Markets continue to bolster Canadian pension plans’ solvency in the third quarter, according to Aon
Aon’s Median Solvency Ratio stands at 99.0%
TORONTO, October 1, 2020 – Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, today released its third-quarter Median Solvency Ratio Survey. Following the financial market rally in the second quarter of 2020, the solvency positions of Canadian defined benefit pension plans continue to improve from June 30, gaining 3.6 percentage points to stand at 99.0% as of Sept. 30 .
“The last few months were probably the calm before the storm with several risks on the horizon such as the potential for further increases in COVID-19 cases during winter and a reduction of government assistance programs,” said Erwan Pirou, Chief Investment Officer for Aon Investments Canada. “Long bond yields are at record lows on the back of central banks’ intervention and clients may want to review how much duration they have. Many clients are now looking to see if their Liability Driven Investments (LDI) mandate is still effective at protecting against an increase in liabilities due to rates falling.”
“The rebound has been pretty remarkable since the end of the first quarter, and we’re almost back to fully funded status. The big difference is that interest rates are down and much of the improvement has been based on return-seeking asset returns. If these change, we could be back to funded levels seen at the beginning of the year,” said William da Silva, Canadian practice director for Retirement Solutions at Aon. “There is still an opportunity to reduce or eliminate risk and prepare for a potential downturn. There are a lot of tools available now, but the window for taking these actions is small in these volatile times. More than ever before, it’s time to take action now.”
Key findings of the survey include:
- Aon’s Median Solvency Ratio increased to 99.0%, up from 95.4% at the end of Q2 2020.
- Canadian 10-year benchmark bond yields increased by 5 bps in Q3, while long bond yields increased by 12 bps. Median liabilities have decreased by 1.2% during the last quarter.
- Median asset returns in Q3 were 2.5%, compared to 11.5% in Q2 2020.
- All equity indices increased in the quarter: MSCI Emerging Markets (7.5%), international MSCI EAFE (2.8%), U.S. S&P 500 (6.8%), global MSCI World (5.9%) and the Canadian S&P/TSX Composite (4.7%). All returns are in Canadian dollar terms.
- Alternative asset class returns diverged: global infrastructure fell 0.6%, while global real estate rose by 0.1%.
- In fixed income, prices remained relatively stable over the quarter. The FTSE Canada Long Term Bond Index fell 0.3%, while the FTSE Canada Universe Index rose 0.4%.
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.
Aon 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.
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