Gains from U.S. equities and shrinking liabilities led to healthier Canadian defined benefit pension plans at the beginning of September, according to Aon’s latest data.
Its median solvency ratio, which tracks the plans it administers, rose one percentage point since Aug. 1, 2018, to 102.9 per cent. The number of plans that are fully funded also rose by 2.4 percentage points, to 57.7 per cent.
“Canadian pensions are still enjoying something of a Goldilocks moment,” said Calum Mackenzie, partner and investment consulting practice director at Aon, in a press release. “In an atmosphere of higher yields and steady returns in risk-seeking assets, especially in the U.S., pension solvency has once again reached a new high.
“Yet the question remains: How long can this moment last? We are seeing significant divergence in returns across asset classes and geographies, suggesting that the days of global increases across the board might be numbered. The commodity price recovery has started to wobble, trade concerns continue to weigh on the business outlook and central bank tightening is raising the risk of a policy overshoot. In short, with every piece of good news, the forward risks mount. That’s why we’re counselling plan sponsors to consider hedging against volatility, locking in their gains and taking an active view toward risk management going forward.”
Gross pension assets posted a return of 0.6 per cent in August, with U.S. stocks leading the way thanks to the S&P500’s 3.4 per cent return. Canadian equities were down 0.8 per cent and emerging markets decreased 2.6 per cent. Alternative assets saw little movement, with global infrastructure losing 0.1 per cent and global real estate gaining 1.1 per cent. Fixed income declined marginally on the month, with Canadian bonds posting modest but positive returns.
The higher median solvency was also aided by an increase in annuity purchases so far in 2018, up 23 basis points, which contributed to a decrease in pension liabilities.