Preview of volatile 2018 as DB pension solvency dips in first quarter

Solvency levels for Canadian defined benefit pension plans came down slightly in the first quarter of 2018, according to Aon’s monthly survey. 

It found, after decade-high levels in the last quarter of 2017, defined benefit plans had a median solvency ratio of 98.7 per cent as of April 1, 2018, falling slightly from 99.2 per cent in the previous quarter.

“Despite a slight decline in median solvency this quarter, the fact remains that DB plans continue to have funded statuses that are exceptionally strong,” said William da Silva, senior partner and retirement practice director at Aon Hewitt, in a press release. “That means it’s the best time in a long time for plan sponsors to implement or at least revisit their risk management strategies.”

Read: DB pension solvency drops from 15-year high in February: survey

Defined benefit plans will have reason to change their posture around investment risk in the foreseeable future, with some Canadian jurisdictions bringing in new solvency funding rules, noted Da Silva. “It is clearly a great time for pension plans to do something to better manage risk,” he added.

The survey also found 46 per cent of plans were more than fully funded on April 1, down very slightly from 47 per cent in the fourth quarter of 2017 and from 48 per cent in the third quarter.

“The first quarter has given pension plans a reminder of the rollercoaster of volatile markets, and a preview of  what we expect to be a more volatile investment landscape in 2018,” said Ian Struthers, partner and investment consulting practice director at Aon Hewitt.

“We have seen some recovery in equity markets from the February selloff, but there are lots of reasons to expect more volatility. Although the economy is generally viewed as strong and corporate performance remains positive, this is offset by high valuations, a long-in-the tooth equity bull market, trade noise and sector risk.”

Read: Equity volatility exerts mild impact on pension plan health in first quarter

Further, movements in interest rates are somewhat uncertain going forward, added Struthers. “Policy rates are rising but a flattening yield curve implies a more pessimistic long-term view.” 

Overall, amid mixed equity and fixed income markets, pension assets during the quarter declined by 0.4 per cent, according to the survey.

“All plans need to be taking advantage of diversification across asset classes, including liquid and illiquid alternatives. When it is not clear where the next market storm will come from, it is important to build an all-weather portfolio,” said Struthers.

Read: The pension industry’s wish list for tax reform