As interest rates rise, Canadian defined benefit pension solvency in third quarter hits highest level in 10 years
October 03 2017 - 4:43PM
As the Bank of Canada raised its target overnight rate twice and
bond yields soared in the third quarter, the median solvency ratio
of Canadian defined benefit (DB) pension plans hit a new
post-recession high, according to Aon’s latest quarterly median
solvency ratio survey.
An infographic accompanying this announcement is available
at http://www.globenewswire.com/NewsRoom/AttachmentNg/21d7ee8e-860a-418f-830a-6677d9784ba0
The improving financial health of Canadian pension plans was
driven by rising bond yields, which effectively lowered plan
liabilities, even though a stronger Canadian dollar adversely
impacted asset returns. Bonds also sold off through the period, but
the corresponding decline in liabilities more than offset the
impact on solvency.
Quotes:“Rising interest rates are good news for
Canadian pensioners and the plans they will rely on in retirement,
and so there was plenty of good news for them in the third quarter,
as most Canadian DB pension plans experienced marked improvements
in financial health,” said William da Silva, Senior Partner and
Retirement Practice Director at Aon Hewitt. “Canadian DB plans are
now enjoying the best median solvency level in a decade, and that
positions them well to prepare for the future. For many plan
sponsors, rising rates will trigger changes in their plan
glidepaths, so they will need to monitor developments very closely
over the next several months. And as asset mix changes, sponsors
should be sure to understand how that will impact their funding
strategies. This will be a key theme as 2017 winds down and we head
into 2018.”
“There is surprisingly little fear in markets right now, and
despite geopolitical risk and high asset valuations, plans have
benefited from the trend toward improving solvency,” said Ian
Struthers, Partner and Investment Consulting Practice Director at
Aon Hewitt. “The good news is that we expect only modest rises in
bond yields and this reduces the risk of a reset in asset values.
That said, there are very few asset classes where valuations are
not at record highs, so smart diversification and a strong
understanding of portfolio risk profile are important. As we have
seen over the past quarter, volatility can come from lots of
places, such as the Canadian dollar. It is always wise to build a
roof when the sun is shining. Pension plans are benefiting from a
Goldilocks state of a bull market in equities and rising yields.
History suggests that won’t last forever.”
Key Facts:
- Aon’s Median Solvency Ratio as of Oct. 2, 2017 was 99.3%, up
from 94.8% as of June 30. The Q3 ratio is at its highest since Q3
2007, when solvency stood at 99.7%.
- Almost half – 47.7% – of plans were fully funded as of Oct. 2,
up from 37% of plans as of June 30.
- Benchmark bond yields rose over the quarter, with Canada
10-year yields up 35 bps and Canada long bond yields up 34 bps.
Higher yields lowered pension plan liabilities, and positively
impacted pension plan solvency over the quarter.
- Pension assets posted a return of 0.1% during the quarter; in
the previous quarter, asset returns were 1.6%.
- Emerging Markets (+3.9%) and Canadian equities (+3.7%) led
equity class returns in the quarter, followed by international MSCI
EAFE (+1.5%), Global MSCI World (+1.0%) and U.S. equity (+0.6%).
Canadian dollar appreciation in the quarter suppressed non-domestic
equity performance in CAD terms.
- In fixed income, rising yields drove down bond portfolio
performance. FTSE TMX Universe bonds were down (-1.8%) on the
quarter, as were FTSE TMX Long Term bonds (-4.1%).
- Global real estate and infrastructure returns ended the quarter
in the red, by -2.2% and -1.1%, respectively, in Canadian dollar
terms.
About Aon’s Median Solvency Ratio surveyAon’s
Median Solvency Ratio measures the financial health of a defined
benefit plan by comparing total assets to total pension liabilities
in the event of plan termination. 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.
About AonAon 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.
Media contactsFor further information please
contact the Aon Hewitt media team: Rosa Damonte (+1.416.227.5718)
or Alexandre Daudelin (+1.514.982.4910)
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