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Financial health of Canadian defined-benefit pension plans hits all-time quarterly high in Q3 2018

Aon’s Median Solvency Ratio at end of September stood at 103.2%.


TORONTO, October 2, 2018 – 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.

Aon's Median Solvency Ratio

Aon's Median Solvency Ratio

About Aon’s median solvency ratio survey

Aon’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.

 

Media contacts

For further information please contact the Aon media team: Alexandre Daudelin, +1.514.982.4910.

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