Canadian defined benefit pension plans continued to improve their solvency in the third quarter as they benefited from market performance, finds research from London, U.K.–based Aon plc.
According to the global professional services firm’s median solvency ratio survey, the solvency positions of DB plans increased to 99% at Q3’s end, up from 95.4% at Q2’s end.
Aon’s median solvency ratio measures the financial health of a DB plan by comparing total assets to total pension liabilities on a solvency basis according to different legislations, a release said.
“The [market] rebound has been pretty remarkable since the end of the first quarter, and we’re almost back to fully funded status,” said William da Silva, Canadian practice director for retirement solutions at Aon, in the release.
With low interest rates, much of the improvement was from return-seeking assets, he said.
All equity indexes increased in the third quarter, including the MSCI Emerging Markets (7.5%), MSCI EAFE (2.8%), S&P 500 (6.8%), MSCI World (5.9%) and S&P/TSX Composite (4.7%). (Returns are in Canadian-dollar terms.)
Median asset returns were 2.5%, compared to 11.5% in Q2, Aon said.
In fixed income, Canadian 10-year benchmark bond yields increased by five basis points in the third quarter, and long bond yields increased by 12 basis points.
Also, the plans’ median liabilities decreased by 1.2% during the quarter.
Despite the improvement in the solvency ratio, Aon noted the need for pension managers to proceed with caution.
“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, in the release.
With long bond yields being at record lows, Pirou suggested pension managers may want to review duration.
“Many clients are now looking to see if their Liability Driven Investments mandate is still effective at protecting against an increase in liabilities due to rates falling,” he said.