Fewer than 8% of defined benefit plans fully funded

By Andrew Rickard | April 06 2016 07:00AM

Aon Hewitt’s most recent Pension Plan Solvency Survey shows that Canadian defined benefit (DB) pension plans continue to struggle with poor stock market returns and declining bond yields.

The survey, which was released on March 3, tracks the performance of 449 defined benefit pension plans that are administered by Aon Hewitt. It includes plans from the public, semi-public and private sectors, and measures their assets over liabilities to calculate their solvency funded ratio.

The research reveals that the median solvency ratio declined 2.1% over February and stood at 80.8% at the end of the month. Overall, only 7.6% of the DB plans surveyed were more than fully funded at the end of February, down from 8.5% on January 1.

Yields declined

The survey also notes that ten-year Canada and U.S. Treasury yields declined by about 10 and 20 basis points respectively in January. This ended up lowering the discount rate that applies to plan liabilities, and counteracted gains resulting from bond price increases. “The net impact of declining yields was a 1.7 percentage point drop in the median solvency ratio,” reads the report.

Ian Struthers, partner in the investment consulting practice at Aon Hewitt, points out that there was some good news in February, namely that Canadian equity returns stabilized somewhat, and the TSX outperformed both the S&P 500 and the MSCI World Index. However, these factors were not enough to compensate for drops in real estate, infrastructure, and commodities.

Disciplined risk-seeking

“With these asset classes in negative territory and rising bond yields increasing plan liabilities, solvency suffered,” comments Struthers. “A patient, long-term view focusing on diversification and disciplined risk-seeking is the best strategy for plan sponsors to work their way through choppy markets.”