A slight decline in solvency notwithstanding, Canadian plans are in position to implement risk-management strategies
The end of 2017 saw Canadian defined-benefit pension plans at decade-high levels of financial health. And according to new figures from global professional services firm Aon, they experienced only a slight decline in the first quarter of 2018.
In its latest quarterly Median Solvency Ratio survey, the firm found that the quarterly median solvency ratio stood at 98.7% as of April 1, dipping only slightly from the previous quarter’s 99.2%.
“Despite a slight decline in median solvency this quarter, the fact remains that DB plans continue to have funded statuses that are exceptionally strong,” said William da Silva, senior partner and retirement practice director at Aon. “That means it’s the best time in a long time for plan sponsors to implement or at least revisit their risk management strategies.”
According to the report, benchmark bond yields changed little over the quarter: from the beginning of the year to March 29, Canada 10-year yields went up five basis points and Canada long bond yields dipped by three basis points. Mixed equity and fixed-income markets also pulled pension assets down by 0.4%; asset returns for the previous quarter were 0.3%.
“The first quarter has given pension plans a reminder of the rollercoaster of volatile markets, and a preview of what we expect to be a more volatile investment landscape in 2018,” said Ian Struthers, partner and investment consulting practice director at Aon.
Struthers noted that despite the equity markets’ recovery from the February selloff, the spectre of volatility remains because of high equity valuations, a “long-in-the-tooth” equity bull market, trade noise, and sector risks. A mixed picture is developing on the fixed-income side, he added, as potential benefits from rising policy rates collide with a flattening yield curve.
“With the move away from solvency funding in some jurisdictions, most plans will be soon experiencing a much different risk environment,” da Silva said. “Couple that with a much deeper market for pension risk transfer and management solutions, and it is clearly a great time for pension plans to do something to better manage risk.”
According to Struthers, plans that are well-funded and have a solvency or windup objective could pursue liability-driven investment strategies as a hedge path that take advantage of interest-rate increases. He also recommended that all plans diversify across asset classes, including liquid and illiquid alternatives.
“When it is not clear where the next market storm will come from, it is important to build an all-weather portfolio,” Struthers said.
