Financial health of Canadian defined-benefit pension plans hits all-time quarterly high in Q3 2018
October 02 2018 - 12:45PM
Rising bond yields and a continuing strong U.S. equity market
helped boost the health of Canadian defined benefit pension plans
to the highest level ever recorded, according to the latest
quarterly Median Solvency Ratio from Aon, a leading global
professional services firm providing a broad range of risk,
retirement and health solutions.
Quotes:“Aon has been measuring median solvency
for the better part of two decades now, and we have never seen
quarterly levels this high,” said William da Silva, Senior Partner
and Retirement Practice Director at Aon. “That’s really good news,
but it also presents a great opportunity for pension plan sponsors
to ask themselves some tough questions about risk. For
instance: Is their asset strategy optimized based on new funding
rules in several jurisdictions? Can risk be further managed by
making strategic contributions? And with funded status in such a
healthy place, have sponsors taken a new look at plan settlement to
further their strategies? In short, the last quarter of this year
can and should be the time to truly understand how the risk of
their programs have changed and how their strategy may need to
change as well.”
“Going into the fourth quarter, the skies seem to have cleared
somewhat thanks to the revised NAFTA and the easing of U.S.-Canada
trade tensions, which had been suppressing domestic equities and
complicating the monetary policy outlook,” noted Calum Mackenzie,
Practice Director, Canada Investment Consulting. “However, a host
of other risks – from a slowing China to tighter financial
conditions – remain in play, so the calm might not last for long.
With strong funded statuses, most plan sponsors have little to gain
from further improvement, but stand to lose a lot if markets
correct. For plans that are not de-risked, funded statuses can be
very volatile and plans could easily revert to deficit positions.
Plan sponsors are engaged in a pension plan game show of sorts;
they can either walk away with their winnings, or play another
round and risk it all. In this environment, we believe that walking
away is the safer bet.”
Key Facts:
- Aon’s quarterly median solvency ratio stood at 103.2 % as of
Oct. 1, 2018, up three percentage points from the previous quarter.
Q3 solvency was the highest measured since 2002, when the quarterly
Median Solvency Ratio began.
- The proportion of plans that were more than fully funded
increased to 58.4%, up from 50.8% at the end of Q2.
- Benchmark bond yields rose throughout the quarter, with Canada
10-year yields up 28 basis points and Canada long bond yields
rising 22 basis points from July 2 to Sept. 28. Higher yields
effectively lower pension plan liabilities, improving
solvency.
- Pension assets during the quarter declined by 1.1%, as most
asset classes had negative returns in the quarter. U.S. equities
continued strong, rising 5.8%, and global MSCI World (+3.2%) also
ended the quarter in positive territory. However, Canadian (-0.6%),
international MSCI EAFE (-0.4%) and emerging market (-4.8%)
equities all declined. (All returns in Canadian dollar terms.)
- As bond yields rose, bond prices declined: the FTSE TMX Long
Term and FTSE TMX Universe bond indices declined through the
quarter by -2.4% and -1.0%, respectively.
- Among alternative asset classes, global infrastructure rose by
0.9%, while global real estate declined by 2.0% as interest rates
rose.
About Aon’s median solvency ratio surveyAon’s
median solvency ratio measures the financial health of a defined
benefit plan by comparing total assets to total pension liabilities
in the event of plan termination. It is the most accurate and
timely representation of the financial condition of Canadian DB
plans because it draws on a large database and reflects each plan’s
specific features, investment policy, contributions and solvency
relief steps taken by the plan sponsor. The analysis of the plans
in the database takes into account the index performance of various
asset classes, as well as the applicable interest rates to value
liabilities on a solvency basis.
About AonAon plc (NYSE:AON) is a
leading global professional services firm providing a broad range
of risk, retirement and health solutions. Our 50,000 colleagues in
120 countries empower results for clients by using proprietary data
and analytics to deliver insights that reduce volatility and
improve performance.
Media contactsFor further information please
contact Alexandre Daudelin (+1.514.982.4910)
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