As financial health of Canadian pension plans improves in second quarter, “complacency is the biggest risk”
July 04 2018 - 12:24PM
As tensions over trade and shifting monetary policy created
volatility in financial markets, the health of Canadian defined
benefit pension plans improved in the second quarter of 2018,
according to the latest quarterly Median Solvency Ratio survey from
Aon, a leading global professional services firm providing a broad
range of risk, retirement and health solutions.
Quotes:“Defined benefit pension plans have
fared remarkably well during a period defined by worrisome
headlines and rising international tensions,” said William da
Silva, Senior Partner and Retirement Practice Director at Aon.
“Now, complacency is the biggest risk. While the Aon Median
Solvency Ratio improved quarter-over-quarter, we’ve seen some
fairly significant variations in the measure over the past few
months – in fact, we’ve seen a decline of 150
basis points in the Median Solvency Ratio from a high point of
101.7% at the end of April. In short, it wouldn’t take much to see
all of this year’s solvency gains erased – and quickly. Clearly,
plan sponsors should now be at least considering steps to implement
or update their risk management strategies. In the past, many
sponsors have been reluctant to do so because of the actual or
opportunity costs involved, but with solvency strong and risks on
the horizon, they no longer have a reason not to
act.”
“We noted at the end of the first quarter that markets had
entered a more volatile investment environment, and the second
quarter confirmed it,” said Ian Struthers, Partner and Investment
Consulting Practice Director at Aon. “In equity markets, we’ve seen
about a 50% increase in volatility so far in 2018 over last year,
but the uncertainty applies beyond stocks. Bond yields fluctuated
by almost 50 basis points through the second quarter – and ended up
pretty much where they began. There is likely more volatility to
come, as central banks continue to recalibrate towards a
higher-interest-rate world, as trade tensions rise globally, and as
geopolitical factors influence commodity prices. In this
environment, it only makes sense for pension plan sponsors to take
advantage of their strong funded positions, lock in some gains, and
take concrete steps to strengthen risk management going
forward.”
Key Facts:
- Aon’s quarterly median solvency ratio stood at 100.2% as of
June 29, 2018, up 1.5 percentage points from the previous
quarter.
- The proportion of plans that were more than fully funded
increased to 50.8%, up from 45.8% at the end of Q1.
- Benchmark bond yields fluctuated throughout the quarter but
ended little changed, with Canada 10-year yields up eight basis
points and Canada long bond yields down three basis points. Lower
yields effectively raise pension plan liabilities, and adversely
impact pension plan solvency.
- Amid mixed equity and fixed income markets, pension assets
during the quarter rose by 1.15%; in the previous quarter, asset
returns were -0.4%.
- As commodity prices rose (+4.9% in Q2), Canadian equities were
the strongest performers among all risk-seeking asset classes in
the quarter, up 6.8%; U.S. S&P 500 (+5.5%), global MSCI World
(+3.8%) and international MSCI EAFE (+0.8%) also ended Q2 in
positive territory. Emerging Market equities were the weakest in
the quarter, falling 6.1% in Q2 and down 2% year-to-date. (All
returns in Canadian dollar terms.)
- In fixed income, FTSE TMX Long Term and FTSE TMX Universe bond
indices rose modestly, by 0.9% and 0.5% respectively, through the
quarter.
- Amid equity volatility, global infrastructure ended the quarter
up 4.3%, while global real estate surged, up 7.3%, in Canadian
dollar terms.
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 the Aon media team: Alexandre Daudelin
(+1.514.982.4910)
A photo accompanying this announcement is available
at http://www.globenewswire.com/NewsRoom/AttachmentNg/1a783350-0d69-492f-9e2f-f488e2f9682f
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