The median solvency ratio of Canadian defined benefit pension plans hit its highest level since before the 2007 financial crisis, according to the latest quarterly pension plan solvency survey by Aon Hewitt.
On April 1, 2017, median solvency stood at 96.7 per cent, up nearly two percentage points since the beginning of the year. In addition, nearly 40 per cent of plans were fully funded at the end of the first quarter, up four percentage points since the last quarter of 2016.
Aon Hewitt credits the movement to continuing positive returns across risk-seeking asset classes, relatively stable bond markets and a rally in global equities.
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“The equity rally that defined the latter half of 2016 has continued into 2017, and was a key driver behind the current solvency ratios,” said Ian Struthers, partner and investment consulting practice director at Aon Hewitt, in a news release.
“However, capital market conditions seem to be at an inflection point. Stocks continue to be priced for perfection, while the selloff in bonds has slowed, suggesting a more pessimistic view of the future. Amid these conflicting signals, our view is that pension plan sponsors should consider their strong solvency position as an opportunity to review their risk management and governance practices, so that they are prepared for market challenges.”
Among risk-seeking asset classes, emerging market equities performed the best in the first quarter, returning 10.8 per cent, while U.S. equities returned 5.5 per cent, international equities returned 6.7 per cent and global stocks, up 5.8 per cent, also performed well, according to the survey. Domestic equities marked the worst performance among tracked stock indices, returning just 2.4 per cent through the quarter. Alternative asset returns were also positive, with global real estate up 1.7 per cent and infrastructure up 5.7 per cent.
Read: Canadian DB pension solvency reaches highest level in two years: survey
“With solvency ratios at their best levels in a decade, conditions may not get much better to take meaningful steps in optimizing risks within pension plans,” said William da Silva, senior partner and retirement practice director at Aon Hewitt. “Many plans that have been on the sidelines waiting for the ‘right’ time to take action should realize that time may be now.”