The financial health of Canadian defined benefit (DB) pensions declined sharply this week after improving through most of the second quarter, according to survey results released Thursday by Toronto-based consulting firm Aon Hewitt.
Fears of the impact of Greece’s default on debt payments to the International Monetary Fund (IMF), along with its inability to broker a deal with creditors, have created sharp declines in asset returns and increases in solvency liabilities for Canadian pensions in just a few days, Aon Hewitt notes.
While pension solvency still improved in the quarter overall, the recent downturn suggests that continuing interest rate and equity market volatility present risks to the outlook for plan solvency — compounded by an expected change in the actuarial treatment of mortality later this year, the firm adds.
On June 30, the median solvency funded ratio stood at 92.9% — a 4.0-percentage-point increase from the previous quarter — and 26.5% of surveyed plans were more than fully funded at the end of Q2, Aon Hewitt reports. Those results represent a reversal of the three-quarter trend of declining solvency, although the median ratio remains below the 96% level set in the second quarter of 2014.
However, before the events in Greece last weekend, the median solvency ratio for surveyed plans stood at 93.7%, the consulting firm notes. This week, amid continuing global equity market uncertainty fuelled by Greece’s debt crisis, the solvency ratio declined sharply before bouncing back up, and it remains unclear how large the impact of the Greek situation will be on plan solvency after Sunday’s referendum.
“Pension plans must take a long-term view and not be overly reactive to short-term market moves, but the events of this past week show the need for a disciplined risk management process in volatile times,” said Ian Struthers, investment consulting practice leader, Aon Hewitt, in a statement. “In solvency terms, Canadian pension plans remain very healthy, so managing risk effectively is vital to protecting their gains and preparing for the future.”
Recent instability in equity markets compounded already-disappointing returns in growth asset classes in the quarter, according to Aon Hewitt. Canadian, U.S. and international equities saw negative returns of 1.6%, 1.2% and 0.8%, while Universe bond returns fell by 1.7% and global real estate investments declined by 8.0%. Offsetting those declines, however, were rising long-term yields — the result of a global bond selloff that saw prices decline sharply — which were responsible for the increase in plan solvency funded ratio, as higher yields raised the discount rates used to value pension liabilities.
A total of 449 Aon Hewitt-administered DB pension plans from the public, semi-public and private sectors participated in the survey, which measures plans’ assets over liabilities to calculate their solvency funded ratio.