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Fear trade in equities and bonds sees financial health of Canadian pension plans plummet to begin 2020

Aon’s Median Solvency Ratio fell 6.7% to the end of February

TORONTO (March 5, 2020) – As bond yields plummeted and uncertainty rattled equity markets, the solvency positions of Canadian defined benefit pension plans declined by 6.7 percentage points to the end of February, according to interim results of the quarterly 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.
“This is a wake-up call for pension plan sponsors,” said Erwan Pirou, Canada Chief Investment Officer at Aon. “The fear over the coronavirus outbreak and, to a lesser extent, U.S. political uncertainty during primary season has exposed market risks that have been building for some time. How long the ‘flight to safety’ will last is anybody’s guess, but given the recent interest rate cuts from central banks, including the Federal Reserve and the Bank of Canada, we may be entering a new and extended phase of even lower bond yields. Equity markets, meanwhile, remain volatile. For pension plan sponsors, those twin uncertainty factors should push them to consider every means to limit downside market risk. Off-cycle assets and alternative investments, such as real estate and infrastructure, should be put on their radar if they aren’t already, although the window of opportunity might be closing fast.”
“The combination of the correction in equity markets and falling bond yields has resulted in a significant drop in the overall solvency position of DB plans that is reminiscent of the volatility we saw during the financial crisis,” said William da Silva, Canadian Practice Director, Retirement Consulting. “We’ve been saying for some time that pensions’ robust overall financial health – both in investments and in the regulatory landscape – presented an opportunity for pension plan sponsors to be more proactive in setting their de-risking strategies. Now the risks have materialized, so it’s time for sponsors to consider real action to capitalize on their still-strong solvency positions, or at least safeguard from any further deterioration in the financial health of their plans and their cash and balance sheet positions.”
Key Facts:

  • Aon’s Median Solvency Ratio declined by 6.7 percentage points from Jan. 2 to Feb. 28, 2020, to 95.8% from 102.5%.
  • Canadian 10-year benchmark bond yields fell by 50 bps to the end of February, while Canada long bond yields fell 40 bps. Declining yields increased pension liabilities by 6.3%.
  • Median asset returns to the end of February were -0.6%. assets returned 2.7% in the quarter, compared with a return of 8.5% in Q1.
  • All equity indices declined: MSCI Emerging Markets (-12.5%), international MSCI EAFE (-11.2%), U.S. S&P 500 (-10.0%), global MSCI World (-5.8%) and the Canadian S&P/TSX composite (-5.0%),
  • Real asset returns were -0,6% at the end of February.

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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