The average defined benefit pension plan saw its funded position continue to improve in April on a solvency and accounting basis, according to a new report by Morneau Shepell Ltd.
During the month, bond yields and credit spreads stabilized, although long-term bond yields increased slightly, negatively affecting long-term fixed income returns. Global equities performed well, rising 2.4 per cent as measured by Morneau Shepell’s world index.
Against this backdrop, the Canadian Institute of Actuaries released new guidance on solvency valuation assumptions in early May, with annuity purchase discount rate guidance that shrank the spread relative to Government of Canada bonds by 20 basis points.
“The impact of this new guidance on DB pension plans’ solvency liabilities is an increase of roughly one to two per cent for non-indexed plans, but depends on the demographic profile of the pension plan,” said Marc Drolet, principal in Morneau Shepell’s asset and risk management team, in a statement accompanying the report.
“While the annuity proxy is just a proxy, the change in the guidance over the quarter shows how important it is for sponsors who are looking to de-risk to proactively monitor annuity pricing opportunities. The gap between accounting discount rates and the internal rate of return on an annuity purchase is currently small, which may allow DB sponsors to purchase annuities with a smaller impact on the corporate balance sheet and [profit and loss] than has historically been the case. Assuming that market conditions remain favourable, 2021 should offer opportunities to further reduce pension risk exposure at an attractive price.”