The median solvency ratio of Canadian pension plans rose in the third quarter of 2016, according to the Mercer Pension Health Index, but the quarterly pension plan solvency survey from Aon Hewitt shows a decline in the same period.
The median solvency ratio of Mercer pension plans clients reached 85 per cent on Sept. 28, up from 82 per cent at the end of the second quarter of 2016. On the other hand, median solvency for Aon Hewitt’s clients was 84.6 per cent on Sept. 29, down from 85.4 per cent on June 30.
However, solvency remains relatively stable, and a growing proportion of surveyed pension plans ended the quarter fully funded, according to Aon Hewitt. “With the immediate impact of Brexit muted and relative stability in monetary policy, the summer proved to be relatively calm for pension plans,” said Ian Struthers, partner and investment consulting practice director at Aon Hewitt. “However, when we look more closely at the quarter, we see that there has been volatility on both the asset and liability sides of the ledger.”
Many sponsors of defined benefit pension plans will be faced with higher pension contributions in 2017 and beyond, said Mercer, noting that the situation is different in Quebec, where most private sector plan sponsors will experience fairly stable pension contribution requirements as a result of the change in funding rules introduced in 2016.
Read: Quebec shakes up pension landscape with shift to going-concern funding
“Many plan sponsors filed valuations with the regulators at the end of 2013, when the health of pension plans was significantly better than it is today,” said Manuel Monteiro, leader of Mercer’s financial strategy group, in a news release. “A large proportion of these sponsors are now faced with having to file a new valuation at the end of 2016 – and these valuations will recognize the deterioration in the financial health that has occurred over the last three years.”
The stock markets recovered rapidly following the turbulence caused by the Brexit vote at the end of June, according to Mercer’s index. U.S. equity returns were modestly positive in both U.S. dollar (four per cent) and Canadian dollar (6.2 per cent) terms. Emerging markets were the best equity asset class during the quarter, returned 8.7 per cent in local currency terms and 12.5 per cent in Canadian dollars.
Aon Hewitt notes there may be limited opportunity for pension plans to continue to see positive gains in risk-seeking asset classes. “The question is, what now?” said Struthers. “The global economy and monetary policy seem to have entered a period of renewed uncertainty, and we see heightened volatility in fixed income and equity markets through the end of the year.
“As well, there are few attractive asset classes left, as prices have risen across the board, and low yields will continue to put pressure on plan solvency. With pensions in a position of strength, a strong focus on optimizing risk is crucial. Smart diversification – potentially including exposure to alternative asset classes – is vital in this environment, and hedging strategies, including currency hedging where plans have large non-U.S. exposures, need to at least be considered.”
Read: 2016 Top 100 Pension Funds Report: Solvency reform on the agenda