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After year of record highs, financial health of defined benefit pension plans ends 2018 in decline

Aon’s Median Solvency Ratio at end of Q4 2018 stood at 95.3%


TORONTO (January 3, 2019) – The solvency positions of Canadian defined benefit pension plans reached all-time highs during 2018, but falling bond yields and equity market volatility in the fourth quarter saw DB plans’ financial health decline on both a yearly and quarterly basis, according to the latest Median Solvency Ratio survey done by Aon, the leading global professional services firm providing a broad range of risk, retirement and health solutions.

“The sour mood that gripped financial markets in late 2018 finally caught up with Canadian pension plans,” said Calum Mackenzie, Partner, Head of Investment, Canada, for Aon“. In the fourth quarter of 2018, Canadian bond yields fell while equity returns were negative as well, a double whammy for pension plan financial health. We don’t expect the volatility to end in 2019, but pension plans’ financial positions remain strong after the longest bull run in history. There were few places to hide in a brutal end to 2018 but those investors that were well diversified did manage to better protect their portfolios.

“Now is not the time to be passive with pension plan financial management as trade concerns, economic growth and geo-political tensions could continue to take their toll on the markets in 2019, added Mackenzie. Investors that have not yet diversified should look for opportunities by selling into market strength and avoid making rash moves.”

“2019 is beginning with even more uncertainty than 2018 did,” said William da Silva, Senior Partner and Retirement Practice Director, Aon in Canada. “We have been saying for some time that plan sponsors should take advantage of historically strong solvency positions and consider diversification and de-risking strategies, including the full settlement of liabilities. The good news is they still have time to act – but as the volatility of the last quarter proves, nothing lasts forever, and time might be running out.”

Key Facts

  • Aon’s Median Solvency Ratio declined sharply in fourth quarter of 2018, to 95.3% as of Jan. 1, 2019. That is down 3.9 percentage points on the year, and a decline of nearly eight percentage points from the all-time quarterly high reached in Q3 2018.
  • 38.5% of plans were fully funded as of Jan. 1, 2019, down by 7.5 percentage points year-over-year and by 20 percentage points on a quarterly basis.
  • Pension assets returned -1.1% in December, reversing many of the gains made previously in 2018. The negative equity returns across the Globe were pared back by a depreciating Canadian dollar.
  • In Canadian dollar terms, Emerging Market stocks comprised the only equity asset class that did not decline in December; the MSCI EM Index was flat for the month. U.S. S&P 500 (-6.5%), international MSCI EAFE (-2.2%), global MSCI World (-5.0%), and Canadian S&P/TSX composite (-5.4%) all fell in December.
  • U.S. stocks were the only equity asset class that provided a positive annual return in CAD terms (+4.2%).
  • In fixed income, falling bond yields saw bond prices increase. FTSE TMX Long Term bonds returned 1.9% in December and 0.3% on the year, while FTSE TMX Universe Bonds returned 1.4% on a monthly and yearly basis.
  • Real asset returns were also negative in December, with global infrastructure down 0.5% and global real estate declining by 3.0%, all in CAD terms.

Median Solvency Index
 

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 on a solvency basis according to the different legislations. 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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