Canadian DB solvency levels dropped double digits in Q1

Canada’s defined benefit plans have had a rough quarter.

According to Aon’s median solvency ratio, DB plans fell to an average solvency of 89.1 per cent at the end of the first quarter, from 102.5 per cent at the end 2019.

Mercer’s pension health index also dropped, from 112 per cent at the end of 2019 to 93 per cent at the end of the first quarter of 2020. Ten percentage points of that fall occurred in March alone.

Declining bond yields pushed pension liabilities higher during the quarter, coupled with overall asset returns of negative 6.6 per cent on average, according to Aon. Global equity markets saw double-digit declines, with the S&P/TSX composite falling a dramatic 20.9 per cent.

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“March might have been the cruelest month for equities, but we are not confident the volatility has ended,” said Erwan Pirou, Canada chief investment officer at Aon, in a press release. “In this environment, it makes sense for pension plan sponsors to consider rebalancing their portfolios to move back to their targets, although constrained liquidity conditions mean they should be very cautious in making trades.

“Sponsors should also remain ready to take advantage of opportunities, which may be arising as market dislocations and tight liquidity conditions create mispricings, which is already the case in credit markets, for example. In the short term at least, we expect suppressed bond yields and volatility to continue, meaning pension plans must continually re-evaluate their risk mitigation strategies.”

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Alternative assets were no safe haven during the quarter, with global infrastructure falling by 22.4 per cent and global real estate by 21.6 per cent, according to Aon.

While solvency levels declined to a significant degree, many Canadian DB plans may not experience immediate cash implications due to recent reforms in Ontario and Quebec where solvency funding is concerned, according to Mercer.

“That these market shocks occurred in Q1 has granted flexibility for these plan sponsors to take action with 2020 regulatory filings,” said Andrew Whale, principal at Mercer Canada, in a press release. “Performing an actuarial valuation at the end of 2019 will grant a fixed contribution schedule until 2022 and allow time for the markets to hopefully recover.”

Read: Could solvency reform in Canada lead to a DB pension revival?