Canadian defined benefit pension plans maintained their solvency levels through the second quarter of 2019, according to Mercer’s latest pension health index.
The index, which represents the solvency ratio of a hypothetical plan, reached 106 per cent as of June 30, 2019, an increase from 102 per cent at the year’s outset. The current solvency level is consistent with the end of the first quarter of the year, when the solvency position of Canadian DB plans climbed quickly after recovering from a rough ride in December 2018.
The median solvency ratio of Mercer clients was at 97 per cent at the second quarter’s end, up from 95 per cent at the end of 2018. These second quarter numbers are consistent with the end of the first quarter of 2019.
As well, pension plans’ liabilities increased off the back of a 20-basis point drop in long-term interest rates during the second quarter. Funded positions were safeguarded, however, by positive equity returns.
The current conditions are a chance for plans with healthy solvency to de-risk, says Andrew Whale, principal in Mercer Canada’s financial strategy group.
“Over the past three quarters, we’ve seen volatility from both equity markets as well as long-term interest rates,” he says. “So it’s a continued reminder that if your plan isn’t taking that risk off the table, there is certainly a high risk of [requiring additional] contributions and dropping below 100 per cent solvency.”
As far as taking risk off the table, annuitization is certainly an option, but far from the only one, adds Whale. “There are a lot of plans that are annuitizing and there are a lot of plans asking whether they should annuitize, but the overwhelming majority of plans are not annuitizing. So many of them have a lot of options at hand, and I would say revisiting the investment strategy and their asset allocation is a first step.
“There are a lot more options for pension plans in the small to mid space in terms of alternative investments, private investments than there have been in the past. So I would encourage all pension plans in Canada to reconsider the asset classes that are available to them to come up with a better strategy going forward.”