Canadian DB solvency flat so far this year

Canadian pension plan solvency has been fairly flat so far this year, but the numbers are up over last year, according to Mercer.

At 93 per cent, the median solvency ratio of Mercer’s pension plan clients remains the same as the beginning of the year. Plans are in a significantly better position than they were a year ago, however.

“Despite yet another decline in long-term interest rates, most DB pension plans remain in strong financial shape,” said Manuel Monteiro, leader of Mercer’s financial strategy group. “However, those plans with large allocations to Canadian equities and lower hedges against interest rate movements will have experienced some deterioration in the second quarter.”

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A typical balanced pension portfolio would have returned 3.6 per cent during the second quarter of 2017, according to Mercer. But while foreign equities were strong, Canadian stocks lagged. “Canadian equities are slightly down during the second quarter of 2017, driven mostly by the energy and the materials sectors, which experienced a setback,” said Sofia Assaf, principal and senior investment consultant at Mercer.

Besides the solvency performance so far this year, Mercer also noted the potential impact of coming regulatory changes in Ontario. With Ontario moving to going-concern funding rules, pension plans should revisit their risk-management strategies, according to Monteiro. “We expect that the new funding rules could spur some plan sponsors to revisit previous decisions to de-risk their pension plans. However, sponsors of plans that have been closed or frozen will likely continue down the path of reducing their risk exposure by moving away from equities into bonds and by entering into annuity transactions.”