Canada’s defined benefit pension plans increased their solvency levels in 2019 and have equity markets to thank, according to Mercer.
The Mercer pension health index, which represents the solvency of a hypothetical plan, increased to 112 per cent in the final quarter of the year, up from 105 per cent at the end of the third quarter and from 102 per cent at the beginning of 2019.
Strong equity market gains boosted the solvency ratio, even with historically low long-term bond yields causing some drag.
“DB plans with substantial equity allocations owe the markets once again for saving them from what could have been a disastrous year,” said Andrew Whale, principal in the financial strategy group at Mercer Canada, in a press release.
Aon’s median solvency ratio also saw a sharp uptick in the final quarter of the year, rising to 102.5 per cent. Throughout the year, the ratio increased by 7.2 percentage points. And more than half (54.2 per cent) of plans included in Aon’s measurement were fully funded at the start of 2020, up 16 percentage points year-over-year.
This was driven by rising bond yields and a late-year equity rally, noted a press release from Aon.
“Plan sponsors need to separate recent events from long-term trends, and that’s nowhere more applicable than when it comes to bond yields,” said William da Silva, senior partner and Canadian director for retirement solutions at Aon. “Despite a rise in yields through the fourth quarter, the long-term trend is still towards ‘lower for longer,’ given subdued inflation expectations and slowing global growth.”
While solvency positions improved, according to Mercer, DB obligations for financial statement purposes were higher overall, in part due to all-time low interest rates, as well as credit spreads. “A one-year increase of 15 per cent on the balance sheet may cause [chief financial officers] and investors alike to take notice of legacy DB liabilities that they may have otherwise glossed over,” said Whale, noting plan sponsors’ appetite for annuitization has increased.
Plan sponsors can take advantage of their strong solvency positions, said da Silva. “Strong solvency positions give plan sponsors an opportunity to put all of their options for managing volatility and risk on the table, from diversification and outsourced investment solutions to full settlement of liabilities. We will see whether the respite from financial market volatility and falling yields lasts, but sponsors should not be lulled into complacency by what could turn out to be a short-term phenomenon.”