Advisors advocating DB plans may need to rethink their strategy.
Defined benefits continued to be defined by ill health.
For the third quarter in a row, the levels of pension plan solvency fell, dropping below 90 per cent for the first time since 2013.
The key drivers of the downward trend are declining long-term interest rates and a corresponding decrease in discount rates used to value plan liabilities.
But it’s not all doom and gloom as a new way forward becomes apparent.
"Falling interest rates are adversely affecting the health of traditional DB plans, but we are seeing a clear picture emerge of the benefits of taking a different course and adopting de-risking strategies," said William da Silva, senior partner for retirement practice at Aon Hewitt.
"The evidence of the past few quarters shows that stronger risk management can help Canadian pension plans weather the storm of market and interest rate volatility, and enable them to better meet their obligations over the long term."
By historical standards, overall plan solvency remains strong, and well above the recent low-water mark of 66 per cent set in 2012.
As well, plan sponsors who took advantage of their relatively robust positions by adopting de-risking strategies, such as delegating investment oversight and decision-making to an outsourced chief investment officer (OCIO), bucked the trend and saw solvency increase for the second quarter in a row.
"Gaining exposure to non-traditional asset classes can effectively mitigate risk and achieve portfolio diversification beyond bonds and equities," said Ian Struthers, with Aon Hewitt’s Investment Consulting Practice.
"Combining this with a strong governance process that dynamically reassess risk is very powerful,” he said. “We have seen plans materially outperform by taking advantage of gains in value, to manage asset allocations and shift from return-seeking assets to interest rate hedging strategies. They protect their gains."
For the third quarter in a row, the levels of pension plan solvency fell, dropping below 90 per cent for the first time since 2013.
The key drivers of the downward trend are declining long-term interest rates and a corresponding decrease in discount rates used to value plan liabilities.
But it’s not all doom and gloom as a new way forward becomes apparent.
"Falling interest rates are adversely affecting the health of traditional DB plans, but we are seeing a clear picture emerge of the benefits of taking a different course and adopting de-risking strategies," said William da Silva, senior partner for retirement practice at Aon Hewitt.
"The evidence of the past few quarters shows that stronger risk management can help Canadian pension plans weather the storm of market and interest rate volatility, and enable them to better meet their obligations over the long term."
By historical standards, overall plan solvency remains strong, and well above the recent low-water mark of 66 per cent set in 2012.
As well, plan sponsors who took advantage of their relatively robust positions by adopting de-risking strategies, such as delegating investment oversight and decision-making to an outsourced chief investment officer (OCIO), bucked the trend and saw solvency increase for the second quarter in a row.
"Gaining exposure to non-traditional asset classes can effectively mitigate risk and achieve portfolio diversification beyond bonds and equities," said Ian Struthers, with Aon Hewitt’s Investment Consulting Practice.
"Combining this with a strong governance process that dynamically reassess risk is very powerful,” he said. “We have seen plans materially outperform by taking advantage of gains in value, to manage asset allocations and shift from return-seeking assets to interest rate hedging strategies. They protect their gains."
