Solvency Ratios Dip in Q2

Low SignSolvency ratios at Canadian defined benefit (DB) plans fell in the second quarter, dragged down by Canadian equities as the Bank of Canada signalled an end to accommodative monetary policy. Aon’s latest quarterly median solvency survey shows plans grappling with weak performance across asset classes, despite posting an overall return of 1.6% (versus 3.2% in the previous quarter). The median solvency ratio as of June 30, 2017 was 94.8%, down from 96.7% as of April 1, 2017.

The sell-off in bonds sparked by the Bank of Canada’s news also lowered returns for plans, although Aon noted that rising yields should support solvency positions going forward.

Funded ratios also dipped: almost 37% of plans were fully funded as of June 30, down from 39% of plans as of April 1

More insights from the Aon report include:

  • Annuity purchase interest rates were down by 6 bps over the quarter. These rates are an input in calculating pension plan liabilities and their decline negatively impacted pension plan solvency over 
the quarter.
  • For the second quarter in a row, Emerging Markets stock performance led all other equity classes, 
with a return of 3.5% in Q2. International (MSCI EAFE) equities and Global (MSCI World) stocks also performed relatively well, returning 3.3% and 1.3%, respectively. U.S. equities were barely positive (0.4%) through the quarter. (All returns in Canadian dollar terms.)
  • Canadian stocks have marked the worst performance among tracked equity indices for two consecutive quarters in 2017, returning -1.6% through Q2.
  • Alternative asset returns were lower on the quarter, with global real estate flat and infrastructure up 1.1%.