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Aon Pension Risk Tracker

Canadian defined benefit pension plans’ financial health improves in 2020: Aon Pension Risk Tracker

TORONTO, January 4, 2021 – Aon plc (NYSE: AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions, announced today that the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index increased from 90.8 % to 91.2% during the past 12 months, according to the Aon Pension Risk Tracker.

The Aon Pension Risk Tracker calculates the aggregate funded position on an accounting basis for the companies in the S&P/TSX Composite Index with defined benefit (DB) plans. To access Aon’s interactive tracker, which dates back to 2013, click here. The tool uses Aon’s Risk Analyzer platform, which allows plan sponsors to track their individual plan’s funded status on a daily basis. Versions of the Pension Risk Tracker are also available for the S&P 500 in the U.S. and for a number of indices in the UK; moving to this platform in Canada allows Aon to take a global view of pension plan funded status.

Key Findings:

  • During 2020, the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite index increased slightly, from 90.8% to 91.2%, according to the Aon Pension Risk Tracker. The funded status deficit decreased only slightly, by $0.2 billion, which was driven by asset increases of $18.7 billion, offset by liability increases of $18.5 billion year to date.
  • Pension assets returned 9.9% over 2020 and were positive in Q4, ending the quarter up 3.9%.
  • The year-end long-term Government of Canada bond yield dropped 55 basis points (bps) relative to the last year-end rate, and credit spreads widened by 13 bps. This combination resulted in a decrease in the interest rates used to value pension liabilities from 2.92% to 2.50%. Given a majority of the plans in Canada are still exposed to interest rate risk, the increase in pension liability caused by decreasing interest rates offset the positive effect of asset returns on the funded status of the plan.

“Equity markets performed strongly in 2020 and helped funded ratios improve,” said Erwan Pirou, Canada Chief Investment Officer, Retirement Solutions, Aon. “However, some pension plans did not realize the full benefit of the equity market rally, as some active equity managers underperformed their benchmark. One possible new year's resolution: look at the structure of your equity portfolio to make sure it's balanced across different equity styles and able to perform well in different environments.”

“After a wild ride throughout the year – funded status cratered in late March, to almost 80% – Canadian pension plans ended 2020 in a similar, if slightly better, funded position compared to how they started the year,” said Nathan LaPierre, Partner, Retirement Solutions, Aon. “Plan sponsors who are in de-risking mode should redouble their efforts to lock in improved funded positions, while those with ongoing DB plans will need to grapple with lower return expectations stemming from ultra-low interest rates.”

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