The markets continued to support growth in the third quarter but there are risks ahead as winter bites
The market rally seen in recent months has helped boost the solvency position of Canada’s pension plans, but that could be about to change.
While the beginning of the year was challenging for funds, the second and third quarters have helped growth, according to the Aon Median Solvency Ratio Survey which increased to 99.0%, up from 95.4% at the end of Q2 2020.
“The last few months were probably the calm before the storm with several risks on the horizon such as the potential for further increases in COVID-19 cases during winter and a reduction of government assistance programs,” said Erwan Pirou, Chief Investment Officer for Aon Investments Canada.
With central banks moving to bolster economies, long bond yields are at record lows and plans are considering whether their liability driven investments (LDI) mandates are still effective at protecting them from liabilities from falling rates.
Market boost
The report highlights gains that have helped Canadian pension plans boost their solvency position:
- Canadian 10-year benchmark bond yields increased by 5 bps in Q3, while long bond yields increased by 12 bps. Median liabilities have decreased by 1.2% during the last quarter.
- Median asset returns in Q3 were 2.5%, compared to 11.5% in Q2 2020.
- All equity indices increased in the quarter: MSCI Emerging Markets (7.5%), international MSCI EAFE (2.8%), U.S. S&P 500 (6.8%), global MSCI World (5.9%) and the Canadian S&P/TSX Composite (4.7%). All returns are in Canadian dollar terms.
- Alternative asset class returns diverged: global infrastructure fell 0.6%, while global real estate rose by 0.1%.
- In fixed income, prices remained relatively stable over the quarter. The FTSE Canada Long Term Bond Index fell 0.3%, while the FTSE Canada Universe Index rose 0.4%.
Risk from low rates
William da Silva, Canadian practice director for Retirement Solutions at Aon, says that the rebound has been pretty remarkable since the end of the first quarter, almost back to fully funded status.
“The big difference is that interest rates are down and much of the improvement has been based on return-seeking asset returns. If these change, we could be back to funded levels seen at the beginning of the year,” he said. “There is still an opportunity to reduce or eliminate risk and prepare for a potential downturn. There are a lot of tools available now, but the window for taking these actions is small in these volatile times. More than ever before, it’s time to take action now.”
