The health of Canadian DB pension plans has continued to decline in 2015, according to Aon Hewitt.
The survey, which assesses the financial health of pension plans by measuring their market value of assets over liabilities, finds that the median solvency ratio not only fell for the third quarter in a row, but dropped below 90% for the first time since September 2013.
At the end of March, the median solvency funded ratio stood at 89%—a two-percentage-point decline from the previous quarter, and a six-point drop from a year ago. Only 18% of surveyed plans were more than fully funded at the end of the first quarter, roughly equivalent to the previous quarter, but down significantly year over year.
Read: Canadian pension plan solvency declines in 2014
The key drivers of lower solvency were declining long-term interest rates and the corresponding decrease in discount rates used to value plan liabilities. Following significant volatility in 2014, interest rates fell dramatically in the first quarter, as 10-year bond yields dropped by about 40 basis points. Countering the difficult rate environment was the performance of U.S. equities (9.3%) and global equities (11.4%), and to a lesser extent Canadian equities (2%).
By historical standards, overall plan solvency remains strong, and well above the recent low-water mark of 66% set in 2012. As well, plan sponsors who took advantage of their relatively robust positions by adopting de-risking strategies, such as delegating investment oversight and decision-making to an outsourced chief investment officer, bucked the downward trend and saw solvency increase for the second quarter in a row.
“Falling interest rates are adversely affecting the health of traditional DB plans, but we are seeing a clear picture emerge of the benefits of taking a different course and adopting de-risking strategies,” says William da Silva, senior partner, retirement practice with Aon Hewitt.
“The evidence of the past few quarters shows that stronger risk management can help Canadian pension plans weather the storm of market and interest rate volatility, and enable them to better meet their obligations over the long term.”
A total of 449 Aon Hewitt-administered DB pension plans from the public, semi-public and private sectors participated in the survey.
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