The pension-consulting firm, Aon Hewitt, has found that the solvency of Canadian defined benefit pension plans fell in the most recent three months.
“Decent equity market returns and pension plan contributions helped offset some of the declines, but overall plan solvency ratio dropped in the third quarter by more than four percentage points from the second quarter – the first decline in plan solvency since June 2012,” said the report issued this week.
Aon Hewitt said that the “decrease in discount rates used to value plan liabilities,” was the main driver for the drop in solvency ratios during the quarter. While the decrease had a positive impact on fixed-income assets, it had a “negative impact on transfer values and the cost of purchasing annuities,” it said.
Of the more than 275 pension plans included in its survey, Aon found their median solvency funded ratio – defined as the market value of plan assets over plan liabilities — stood at 91.1% at Sept. 26, 2014. In contrast, the comparable ratio was 96% at the end of June. In April 2014, the ratio was 96.8% — the peak for the year. But as a sign of how far things have improved over the medium term, the solvency ratio was 88% in September 2013.
“Now that we have seen plan solvency decline for the first time in over a year and a half, hopefully this will serve as a wake-up call to all plan sponsors to consider their funding and investment strategies with risk management as their key objective,” said William da Silva, senior partner, retirement practice, at Aon Hewitt.
As for the future, da Silva said that “market volatility continues to present significant risks and plan sponsors should be implementing or fine-tuning their de-risking strategies in order to stay current and optimized in the face of ever-changing capital market conditions.”
Indeed Aon Hewitt expects that the release, next year, of actuarial standards for solvency valuations will be a major negative for the solvency of pension funds. Those new standards, which will take into account the new mortality tables released earlier this year, “will have a real impact on the solvency liabilities of DB plans,” because mortality tables project longer life spans for Canadian pensioners.” If those standards were in effect today, Aon Hewitt estimates that the solvency ratio would be 86.9% compared with 91.1%.
The slide in solvency in the third quarter also meant a drop in the percentage of funds that are fully funded. At the end of September, about 23% of the surveyed plans were more than fully funded compared with 37% in the previous quarter and 15% in the third quarter of 2013.
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