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Market rebound brings Canadian pension health to a better position in second quarter

Aon’s Median Solvency Ratio gains 6.3 percentage points in the last three months

TORONTO (July 2, 2020) – Following the financial market collapse in March due to the coronavirus spreads, the solvency positions of Canadian defined benefit pension plans rebounded from March 31, gaining 6.3 percentage points, according to the second-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.

“Equity markets have experienced a spectacular and unexpected recovery in Q2 despite the biggest economic downturn in recent history,” said Erwan Pirou, Canada Chief Investment Officer, Aon. “Rebalancing portfolios at the end of March proved to be a good strategy and we would continue to recommend this strategy to crystalize the equity market gains.”

“Some opportunities in mainstream public markets created by the dislocations in Q1 have already disappeared for the time being. They will likely come back and therefore it makes sense to have an opportunistic approach to capture them”, added Pirou. “We continue to see opportunities in private and less liquid markets, while long bond yields are at an all-time record low on the back of central banks intervention. Many clients may want to review how much duration they have.”

“The first half of 2020 shows perfectly what kind of risk are inherent in pension plans as we saw equity markets and underlying interest rates both impact plans”, said William da Silva, Canadian Practice Director, Retirement Solutions, Aon. “We have almost come full circle from January 1. It’s almost like we are getting a ‘do-over’. More than ever, it’s time to assess risk, evaluate options to manage funded status volatility and act before another event hits your plan.”

Key Facts:

  • Aon’s Median Solvency Ratio rose to 95.4%, up from 89.1% at the end of Q1.
  • Solvency fell by 6.7 percentage points in March alone, but since then rose back almost at the same point it was at the end of February (95.8%) – It reached its lowest point during the third week of March (82.5%).
  • Canadian 10-year benchmark bond yields fell by 11 bps in Q2, while long bond yields fell 22 bps. Declining yields increased pension liabilities by 2.2%.
  • Median asset returns in Q2 were 11.5%, compared to -9.0% in Q1 2020.
  • All equity indices increased sharply in the quarter: MSCI Emerging Markets (13%), international MSCI EAFE (9.9%), U.S. S&P 500 (15.4%), global MSCI World (14.2%) and the Canadian S&P/TSX composite (17%). All returns are in Canadian dollar terms.
  • Alternative asset class returns diverged: global infrastructure fell 2.7%, while global real estate rose by 5.3%.
  • 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 11.2%, while the FTSE Canada Universe Index rose 5.9%.

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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