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.”
Aon has also published its latest median solvency ratio survey, citing a slight decline in Canadian DB plans’ positions in the second quarter of the year. It noted the median solvency remains high by historical standards, but that falling bond yields suggest plan sponsors should prepare for volatility ahead.
“Despite the slight solvency ratio decline in the second quarter, the fact remains that the funded status of DB plans in Canada is still high, while many plans are at or getting close to a strategic end state,” said William da Silva, Canadian practice director for retirement consulting at Aon, in a press release.
“Given the volatility we have seen over the past few months, it’s arguably more important than ever that plan sponsors review and, where necessary, revise their end-game strategy. Is it settlement? Hibernation? Or perhaps sustainability? With market conditions changing quickly, governance processes have to be agile, because windows of opportunity — and risk — will emerge and close suddenly. Plans will often have to be able to move quickly to take advantage.”