Canadian DB plans end 2018 on sour note

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Vector : Decreasing graph and arrow on red background © Anuwat Donkiewpri /123RF Stock Photos

2018 wrapped up on a sour note for Canadian defined benefit plan sponsors, as their solvency positions fell sharply in the fourth quarter of 2018, more than reversing all gains from the first nine months of the year, according to Mercer.

“Canadian pension plans took a significant hit in the fourth quarter, but thankfully they were starting from a very strong position” said Manuel Monteiro, leader of Mercer Canada’s Financial Strategy Group in a press release.

The Mercer Pension Health Index represents the solvency ratio of a hypothetical plan and fell from 112 per cent on Sept. 28, 2018 to 102 per cent on Dec. 31, 2018 and 106 per cent at the beginning of the year. The median solvency ratio of the pension plans of Mercer clients was at 95 per cent on Dec. 31, 2018 down from 102 per cent at Sept. 28, 2018 and 97 per cent at the end of 2017.

Less than 30 per cent of Canadian pension plans ended the year fully funded, down sharply from the 60 per cent that achieved that level at the end of September, the release said.

Despite this sharp and sudden decline in funded positions, the impact on pension plans should be relatively muted as many funds were in surplus and have some cushion to absorb the hit, the release said.

While it is unclear if weak financial markets will continue in 2019, the release notes plan sponsors with closed or frozen DB plans should consider “taking risk off the table” either through asset mix changes or risk transfers.

“The fourth quarter was the most active quarter in Canadian annuity market history, with an estimated $1.5 billion of liabilities being transferred from pension plans to insurance companies.  As we expected, plan sponsors benefited from very favourable pricing as insurers worked hard to meet their aggressive sales quotas,” said Monteiro.

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