Thanks to continuously generous Canadian equity returns during the second quarter of 2014, the health of the country’s DB pension plans reached the highest median solvency ratio since September 2007.

According to an Aon Hewitt survey, these plans’ median solvency funded ratio (the market value of plan assets over plan liabilities) stood at 96% as of June 26, 2014. That’s an improvement of 0.6 percentage points over the first quarter of 2014 and a 19-point increase from the same quarter in 2013.

Also, approximately 37% of the surveyed pension funds were more than fully funded at the end of the quarter, compared with 36% in the previous quarter and 5% in the second quarter of 2013.

A clear divergence has emerged between pension plans with traditional asset mixes and those that have adopted a de-risking strategy.

As equity markets have performed well, long-term interest rates—a key factor in plan solvency—have declined, causing the average pension plan to experience a flat quarter. In fact, much of the slight increase in the median solvency ratio can be explained by contributions made by plan sponsors.

In contrast, pension funds that had introduced risk management strategies continued to experience improvements in overall solvency, ending the quarter with a solvency position that was two to three percentage points better than other plans.

“As the solvency of Canadian DB plans has risen over the past year, we have been encouraging sponsors to rethink their funding and investing strategies to better manage risks,” says William da Silva, senior partner, retirement practice with Aon Hewitt. “This quarter’s survey clearly shows the value of having a clear risk management strategy.”

Several recent developments in the marketplace for pension risk management create opportunities for plan sponsors to modify their funding and investment strategies. Beyond simply analyzing their plans’ risk profiles as capital markets continue to change, other options include full immunization of assets to plan liabilities, partial settlement and full plan wind-up.

Over the first two quarters of 2014, the company has seen more plan sponsors exploring these strategies to mitigate risk over the long term and preparing for their implementation.

More than 275 Aon Hewitt administered pension plans from the public, semi-public and private sectors participated in the survey

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Chris Young:

Excellent article. Good to see that there are still pension experts who think that Defined Benefit pension plans are still a viable option.

Sunday, August 24 at 7:23 am | Reply

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