Pension solvency takes a hit

down marketsThe solvency position of Canadian pension plans declined in the first quarter of 2016, an impact of volatile markets, according to two reports published this week.

According to the Mercer Pension Health Index, the median solvency ratio of the consultancy’s pension clients stood at 82% on March 30, 2016, down from 85% at the beginning of the year.

Aon’s quarterly solvency survey had similar findings, with median solvency on March 29, 2016 at 83.1%, compared with 87.6% at the end of the previous quarter.

According to Mercer, the decline in funded status was due to poor global equity market performance, further declines in long-term bond yields and the strengthening Canadian dollar, which negatively impacted the return on unhedged foreign assets.

“The relatively small decline in the solvency position of pension plans masks the considerable volatility that occurred in the first quarter of 2016,” said Manuel Monteiro, leader of Mercer’s Financial Strategy Group.

“At the end of February, the solvency position of a typical pension plan was down by 6%. However, March was a good month with pension plans recovering about half of those losses.”

“Uncertainty in global economies is causing volatility in commodities and currency, as well as raising concerns about equity valuations and interest rate direction,” said Ian Struthers, partner of Aon’s Investment Consulting Practice.

“In these kinds of markets, it is important for pension funds to maintain a long investing view and manage exposures accordingly. For instance, foreign-denominated assets in pension portfolios reduce overall volatility over the medium and long term. While gains in performance last year were erased by the impact of a stronger loonie this quarter, clients who used smart hedging and other de-risking strategies mitigated volatility.

“We expect volatility in debt and equity markets to continue through 2016, so sound risk management will continue to benefit Canadian plans going forward.”