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Financial market volatility brings Canadian pension health to lowest level in more than three years

Aon’s Median Solvency Ratio falls 13.4 percentage points in first quarter

TORONTO (April 1, 2020) – With global equity markets and bond yields plummeting as the coronavirus spreads throughout the world, the solvency positions of Canadian defined benefit pension plans declined by more than 13 percentage points from Q4 2019, representing the lowest level of financial health since November 2016, according to the first-quarter Median Solvency Ratio Survey by Aon plc (NYSE:AON), the leading global professional services firm providing a broad range of risk, retirement, and health solutions.


“March might have been the cruelest month for equities, but we are not confident the volatility has ended,” said Erwan Pirou, Canada Chief Investment Officer at Aon. “In this environment, it makes sense for pension plan sponsors to consider rebalancing their portfolios to move back to their targets, although constrained liquidity conditions mean they should be very cautious in making trades. Sponsors should also remain ready to take advantage of opportunities, which may be arising as market dislocations and tight liquidity conditions create mispricings – which is already the case in credit markets, for example. In the short term at least, we expect suppressed bond yields and volatility to continue, meaning pension plans must continually re-evaluate their risk mitigation strategies.”
“The first quarter of 2020 is shaping up to be the worst for the Canadian pension plans in more than a decade – perhaps ever,” said William da Silva, Canadian Practice Director, Retirement Solutions. “Volatility and lower asset prices will undoubtedly have implications for pension plan sponsors’ risk management strategies and for their cash positions. If they haven’t done so already, sponsors need to update their cash-flow projections and review their risk management, and the strategies that are available to manage contributions in the face of deteriorating solvency positions. There might also be opportunities in the pension risk transfer market for plans that have been waiting to transact, given bond volatility. In general, though, we believe it is a best practice for pension plans to stay true to their risk management strategies. Now is the time to react in a measured fashion – not overreact to market conditions that are still in a state of flux.”

Key Facts:

  • Aon’s Median Solvency Ratio declined to 89.1%, down from 102.5% at the end of 2019.
  • Solvency fell by 6.7 percentage points in March alone – median solvency stood at 95.8% at the end of February – but rebounded from 85.7% after March 12.
  • Canadian 10-year benchmark bond yields fell by 91 bps in Q1, while long bond yields fell 38 bps. Declining yields increased pension liabilities by 6.3%.
  • Median asset returns to the end of Q1 were -6.6%, compared with +1.6% in Q4 2019.
  • All equity indices declined sharply in the quarter: MSCI Emerging Markets (-16.1%), international MSCI EAFE (-15.3%), U.S. S&P 500 (-11.8%), global MSCI World (-13.3%) and the Canadian S&P/TSX composite (-20.9%). (All returns are in Canadian dollar terms.)
  • Alternative asset classes also declined: global infrastructure fell by 22.4%, while global real estate fell by 21.6%.
  • In fixed income, falling bond yields drove prices higher, though not enough to offset the adverse impact on plan liabilities. The FTSE Canada Long Term Bond Index rose by 0.2%, while the FTSE Canada Universe Index rose 1.6%.


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.

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