Two different reports show that Canada’s DB plans are continuing to show signs of improvement as a result of stronger equity markets and higher long-term interest rates.
Aon Hewitt’s survey of more than 275 administered pension plans from the public, semi-public and private sectors, indicates that the median pension solvency funded ratio increased to 88% at the end of the third quarter.
That’s 11 percentage points higher than at the end of June and 19 percentage points higher than it was at the end of 2012.
“The significant improvement of solvency ratios in Canadian plans means that the average Canadian DB plan has erased more than 50% of its solvency deficit since the beginning of the year,” says Will da Silva, the senior partner in the firm’s retirement practice.
“For the strategic plan sponsor, this results in a significant reduction in their minimum required contributions in 2014 and beyond.”
Meanwhile, the Mercer Pension Health Index stood at 98% at the end of September, up from 82% at the start of the year and 94% at the end of June. The index is now at its highest level in six years.
The proportion of pension plans that are fully funded on a solvency basis has increased to 14% from about 6% at the beginning of the year. And the proportion of pension plans that were less than 80% funded has decreased to 11% from 60% in the same period.
However, the story isn’t positive for all pension plans.
Read: Longer lives pose risks for all plan sponsors
The Canadian Institute of Actuaries (CIA) released new guidance that significantly increases solvency liabilities for pension plans that automatically index pensions based on increases in the consumer price index.
“While the changes to the actuarial guidance primarily affect the minority of Canadian pension plans that automatically index pensions, the impact on many of those plans is very significant,” notes Manuel Monteiro, a partner in Mercer’s financial strategy group.
In addition, further headwinds are expected following the July release of a CIA research report that shows pensioner life expectancies are significantly higher than the current mortality tables indicate.
It’s expected that a new mortality table will be adopted for purposes of determining pension commuted values in late 2014.
“We expect that a change in commuted value standards to reflect the new mortality table will reduce solvency ratios by about 2% on average,” says Monteiro.
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