Canadian defined benefit pension solvency improved quarter-over-quarter, rising by 2.3 percentage points in the quarter to June 30 as the immediate selloff in equities following Britain’s vote to leave the European Union reversed in the last week of June, according to a survey by Aon Hewitt.
The survey, which is based on the results from 449 defined benefit pensions administered by Aon Hewitt, found the median solvency was 85.4 per cent on June 30, compared with 83.1 per cent at the end of the previous quarter and 87.1 per cent as of June 1.
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In a news release, Aon Hewitt said its data suggests the short-term impact of Britain’s may already be subsiding. In the 48 hours after the vote result, overall pension solvency declined from pre-Brexit levels by as much as 1.7 percentage points, but recovered substantially as stock markets in the last week of June.
“Brexit understandably created a lot of anxiety around the state of the global economy and the destabilizing effect of nationalist movements, but the reality is that the event itself had minimal short-term impact on our pension clients, who think long-term,” said Ian Struthers, partner and investment consulting practice director at Aon Hewitt.
“However, we believe the continued decline in bond yields, which is likely only to be aggravated in a post-Brexit world, highlights a longer-term challenge for pensions, and represents a risk factor that plan sponsors need to have a position on and address.”
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A continuing, deep low-yield environment, coupled with ongoing uncertainty in risk-seeking assets and currencies, suggests that plan sponsors will be challenged to meet their target plan returns and need to evaluate risk in their portfolios and steps to mitigate volatility, added Struthers.
“Despite the recent rebound in stocks, it’s difficult to see on the horizon anything other than heightened volatility in stocks and suppressed fixed-income yields,” he said. “In this environment, active and informed risk and volatility management, including diversification, smart hedging and other de-risking strategies, should be on the minds of all pension plan sponsors.”
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Beyond Brexit, Canada’s defined benefit pension plans have other issues to address closer to home, including the recently agreed expansion of the Canada Pension Plan, which will begin to roll out in 2019. With the added volatility in markets, William Da Silva, senior partner and national retirement practice leader at Aon Hewitt, says that task has now become more challenging, and yet more vital than ever.
“Market volatility, especially when linked to high-profile events like Brexit, naturally leads plan sponsors to carefully consider their investment strategies,” added Da Silva.
“That’s perfectly appropriate, especially in light of hedging liability movements, but they should also not lose sight of the other levers at their disposal to manage risk. With changes in the CPP coming, the long-term market outlook clouded, and 2016 being an important year for most plan sponsors in establishing minimum funding for the near future, plan sponsors should go beyond investments and consider ways to optimize their funding and benefit strategies in response to a rapidly changing pension landscape.”
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Aon Hewitt’s survey also found that 9.1 per cent of surveyed pension plans were fully funded, at the end of June, an increase of more than a percentage point from the fully funded ratio (eight per cent) in the first quarter of the year.