Pension plans see little relief from rally
TORONTO - The solvency position of most defined benefit pension plans improved only slightly in the first quarter despite a strong rally on equity markets over most of that period, according to the second such study released this week.
The most recent findings, issued Wednesday by consultancy Aon Hewitt, found that the median solvency ratio of defined benefit plans in Canada increased only one percentage point in the quarter to 69 per cent.
As well, about 97 per cent of the pension plans in the sample it looked at had a solvency deficiency.
The results somewhat mirrored findings announced earlier this week by Mercer, whose Pension Health Index showed the solvency ratio of its model plan rising three percentage points to 63 per cent at the end of March.
Mercer credited an increase in long-term federal bond yields for raising the index by about one percentage point, while positive investment returns bumping the index up by roughly two percentage points.
The solvency funded ratio measures the financial health of a defined benefit pension plan by comparing the amount of assets to total pension liabilities in the event of a plan termination.
Aon Hewitt said a typical pension fund earned an average return of 3.6 per cent in this first quarter, made possible by good equity markets performance. That included a 4.4 per cent return on the Canadian stock exchange, 10.5 per cent in Canadian dollars on U.S. equities and 8.9 per cent in Canadian dollars on international equities.
However, market have turned sharply lower in recent weeks, with the Toronto Stock Exchange having given back most of its 2012 gains.
Interest rates used in the March 31 solvency liability calculation were broadly comparable with interest rates at the end of 2011, said Thomas Ault, an associate partner and actuary with Aon Hewitt in Vancouver.
"Interest rates are still at historically low levels, which mean solvency liabilities remain very high," Ault added.
Aon Hewitt is the human resource solutions business of global risk management, insurance and reinsurance brokerage Aon plc (NYSE:AON).
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