Hard Times for Pension Plans

par Andrew Rickard | September 29 2015 09:35AM

Persistently low long-term interest rates and poor equity market performance pushed Canadian pension plan solvency ratios lower during the third quarter of 2015.

The human resources and financial services consulting firm Mercer reports that the median solvency ratio for its pension plans clients was 87% at the end of Q3, down from the 92% reported at the end of the previous quarter. The Mercer Pension Health Index, which calculates the solvency ratio of a hypothetical plan, also declined; it now stands at 93%, down from the 98% reported at June 30.

Not only did equity markets perform poorly during the period, but long-term government bond yields also declined by around 10 basis points. As a result, Mercer has calculated that a typical, balanced pension portfolio would have lost 2.3% during the third quarter of 2015.

"Many organizations remain more exposed to pension risk than they would like to be," comments Manuel Monteiro, leader of Mercer’s Financial Strategy Group. "Organizations that have been counting on a rise in long-term interest rates have been disappointed for the better part of the last decade.  We think it is time for pension plan sponsors to develop a robust risk management strategy that is less reliant on a hope that interest rates will rise."