Countering earlier positive reports on pension plan performance so far this year, Aon Hewitt is seeing a decline in the median solvency ratio in the second quarter of 2017.
The firm cited hawkish remarks on interest rates by the Bank of Canada in reporting the median solvency ratio of Canadian defined benefit plans had fallen to 94.8 per cent as of June 30, 2017. That was down from 96.7 per cent on April 1.
Bond returns suffered in June after bond yields rose late in the month amid expectations of rising interest rates, Aon Hewitt noted. “For much of the past year, capital markets were in a Goldilocks state, but the landscape changed in June,” said Ian Struthers, partner and investment consulting practice director at Aon Hewitt.
Read: Canadian DB solvency flat so far this year
“The equity rally appears to have softened in June, while central banks, including the Bank of Canada, seem in the mood to raise interest rates. That’s a big change after a decade of extraordinary monetary stimulus, and markets will have to adjust. Strong equity valuations may be in retreat, and the potential for higher rates could be the stimulus for much higher market volatility.”
Despite the negative sentiment, the average Canadian pension plan still saw a return of 1.6 per cent during the second quarter. Canadian equities and alternative assets were weak, while global real estate was flat and infrastructure was up 1.1 per cent.