The solvency positions of Canadian defined benefit pension plans declined by 6.7 percentage points from Jan. 2 to Feb. 28, 2020 (95.8% from 102.5%), according to interim results of the quarterly Median Solvency Ratio Survey, by Aon plc.

Plummeting bond yields and the uncertainty that has rattled equity markets is to blame says Aon. “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.”

Canadian 10-year benchmark bond yields fell by 50 bps to the end of February, while Canada long bond yields fell 40 bps, says Aon. Declining yields increased pension liabilities by 6.3%.

Exacerbating this situation, 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,” advised Pirou.

Reminiscent of volatility seen during the financial crisis

William da Silva, Canadian Practice Director, Retirement Consulting at Aon, stated that the drop in the overall solvency position of DB plans “is reminiscent of the volatility we saw during the financial crisis.”

He added, “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.”