Q3 saw the highest level of health for defined-benefit pension plans ever recorded by the firm
According to global professional services firm Aon, Canadian defined-benefit pension plans have risen to the highest level of financial health that it’s ever recorded, thanks to rising bond yields and persistent strength in the US equity market.
“Aon has been measuring median solvency for the better part of two decades now, and we have never seen quarterly levels this high,” said William da Silva, Senior Partner and Retirement Practice Director at Aon.
As of October 1, quarterly median solvency ratio stood at 103.2%, up 3% from the previous quarter. The Q3 solvency ratio was the highest measured since Aon first reported the statistic in 2002. Over 58.4% of plans were more than fully funded.
Benchmark bond yields rose throughout the quarter: from July 2 to September28, Canada 10-year yields were up 28 basis points, while Canada long bond yields rose by 22 basis points. With the higher yields, pension plan liabilities decreased, which in turn improved solvency.
Pension assets declined by 1.1% during the quarter as most asset classes saw negative returns on a dollar basis. While US equities advanced 5.8% and the global MSCI World benchmark went up 3.2%, it was a losing quarter for Canadian (-0.6%), international MSCI EAFE (-0.4%), and emerging-market (-4.8%) equity indices.
Bond prices fell as a result of rising bond yields: the FTSE TMX Long Term and FTSE TMX Universe bond indices declined ended the quarter in the red by -2.4% and -1.0%, respectively. Looking at alternative assets, global infrastructure rose by 0.9%, whereas global real estate declined by 2% following hikes in interest rates.
“Going into the fourth quarter, the skies seem to have cleared somewhat thanks to the revised NAFTA and the easing of U.S.-Canada trade tensions, which had been suppressing domestic equities and complicating the monetary policy outlook,” said Calum Mackenzie, Practice Director, Canada Investment Consulting.
“However, a host of other risks – from a slowing China to tighter financial conditions – remain in play, so the calm might not last for long,” Mackenzie continued. “With strong funded statuses, most plan sponsors have little to gain from further improvement, but stand to lose a lot if markets correct.”
