The Canadian plans bounced back from their end-2018 declines, but questions linger from trends in bond yields
The latest figures from Aon revealed a rebound in Canadian defined-benefit pension plans in the first quarter of 2019.
Following the late-2018 equity selloff that left their financial health in a state of decline, Canadian defined-benefit pension plans saw their solvency positions rebound along with stock markets. Aon’s Median Solvency Ratio rose 3.3% in Q1 2019, with 47% of plans being fully funded as of April 1, as compared to 38.5% of plans at the end of Q4 2018.
That rise in solvency came as pension assets returned 8.5% in the first quarter. All equity indices posted positive returns in Q1. In Canadian dollar terms, the S&P/TSX composite rose by 13.3% to lead all others. The S&P 500 rose 11.2% and the global MSCI World index advanced by 10%. The MSCI Emerging Markets and MSCI EAFE indexes, meanwhile, rose by 7.5% and 7.6%, respectively.
“The first quarter was very good for pension asset returns, particularly coming on the heels of a year that most institutional investors would rather forget,” said Calum Mackenzie, partner, head of Investment, Canada, for Aon. “Domestic and global equity markets rallied, while the volatility that marked the fourth quarter of 2018 receded.”
Real asset returns also kept pace with equity gains in Q1. Global infrastructure rose by 11.4%, while global real estate increased by 12.1%.
But questions still remain as falling bond yields and a flattening curve send signals of caution. Canadian bond yields fell in Q1 2019, with Canada 10-year yields falling 34 basis points and Canada long bond yields decreasing by 28 basis points. Fixed-income prices and returns also rose, with the FTSE TMX Long Term Bond Index rising by 6.9% as the FTSE TMX Universe index rose by 3.9%.
With lower yields, pension plans may see their liabilities increase as well as diminished expectations for risk-asset returns, creating headwinds for future plan solvency.
“Market volatility is unlikely to stay missing-in-action for long, given continuing uncertainty over developed-market monetary policy, global economic growth and political risk,” Mackenzie said. “While the first quarter in 2019 was positive, many plan sponsors continue to be complacent and play the waiting game. However, given the economic backdrop, we believe it’s prudent for plan sponsors to revisit investment strategies to ensure gains made in recent years are not eroded.”
