The median solvency ratio for Ontario’s defined benefit pension plans has risen two per cent, from 78 per cent to 80 per cent since Mar. 31, according to a quarterly report by the Financial Services Commission of Ontario.
The two per cent increase was due to an investment return of 3.1 per cent on the model pension fund in the second quarter of 2016. The fund earned a year-to-date rate of return of 3.3 per cent. These rates of return, according to FSCO, were developed based on an asset mix that’s 45 per cent in fixed income, 30 per cent in Canadian equities and 25 per cent in foreign equities.
The report also showed that 21 per cent of Ontario’s defined benefit pensions reported a solvency ratio between 85 per cent and 100 per cent, and five per cent of plans showed a solvency ratio greater than 100 per cent.
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The pension regulatory body said the median solvency ratio reflects market conditions as of June 30, with the exception of prescribed commuted value interest rates calculated at levels prior to the British vote to leave the European Union. If those rates had been factored in, said FSCO, the median solvency ratio would have been lower at about 77 per cent.
FSCO also noted that Britain’s decision to leave the European Union affected capital market conditions by causing stock markets to tumble on June 24, one day after the referendum vote, as money flowed out of equities and into bonds.
While equity markets had largely recovered a week later, yields continue to be lower than they were pre-Brexit, said the regulator, noting Brexit is a reminder of “how sensitive pension plan solvency positions are to changes in capital market conditions, especially actual returns on invested assets and long-term interest rates.”
The report concluded that pensions usually experience short-term fluctuations and when assessing their viability in the long term, a balanced weight should be given to long- and short-term measures.
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