With Ontario’s defined benefit pension plans in their best financial shape since 2009, the Financial Services Regulatory Authority of Ontario is advising plan sponsors and administrators to better prepare for the future.
“They need a good sense of investment policies as well as how the plan itself may be affected [by different scenarios],” says Lester Wong, chief actuary at the FSRA. “[Plan sponsors and administrators] also need a good grasp of risks the plan is exposed to and a set of variables in their toolkit to respond to different economic scenarios. . . . Plans are in great shape and it’s now time to maintain that position.”
The FSRA’s latest quarterly solvency report, published in mid-February, found 81 per cent of the province’s DB plans had a solvency ratio greater than 100 per cent at the end of 2021, compared to 67 per cent at the end of the third quarter of 2021 and 45 per cent in the last quarter of 2020. In addition, it found the median projected solvency ratio at the end of 2021 was 110 per cent, compared to 106 per cent at the end of September 2021 and 98 per cent at the end of 2020.
While performance across asset classes — including cash, Canadian and foreign equities and fixed income — was strong in the fourth quarter of 2021, Wong says equities provided Ontario’s DB plans with the highest returns, as the the S&P/TSX composite index rose by 6.5 per cent.
And with increasing inflation continuing to make headlines, there’s implications for pension plan sponsors, he says. “From a pension perspective, [inflation] would generally result in higher long-term bond yields, which are related to solvency discount rates. That leads to lower solvency liabilities.
“That’s just one part of the equation — when you look at other elements, it’s much more complex. For example, the impact of inflation on different asset classes is something we can’t predict. There’s also an element of inflation that affects pensions, in terms of earnings, which usually try and keep up with inflation or sometimes pensions themselves are indexed to inflation in some way. Those situations generally increase liabilities.”