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Canadian pension plan solvency declines

Long-term rates drag DB plans down.

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down marketsLower long-term interest rates drove down the solvency of Canadian DB plans from July to September. It was the first decline in two years.

According to the latest pension plan solvency ratio survey by Aon Hewitt, the market value of plan assets over plan liabilities stood at 91.1% at Sept. 26. That represents a decline of 4.9 percentage points since the end of June.

With the decline, this quarter’s survey results reverse a trend throughout 2013 and 2014 of improving solvency positions for the surveyed plans.

Also, about 23% of the surveyed plans in the third quarter were more than fully funded at the end of the third quarter this year, compared with 37% in the previous quarter and 15% in the third quarter of 2013.

The impact of lower long-term rates on plan performance made it even clearer that pension plans that continue to take interest rate risk and those that have adopted a de-risking strategy perform very differently amid market volatility. Overall, equities performed well in the third quarter of this year, but with long-term interest rates continuing their decline, the average pension plan had weaker performance than plans that have instituted a de-risking plan.

“Canadian DB plans have strung together a nice run of winning quarters, but as we have been saying for some time now, market volatility continues to present significant risks and plan sponsors should be implementing or fine-tuning their de-risking strategies in order to stay current and optimized in the face of ever-changing capital market conditions,” says William da Silva, senior partner, retirement practice, with Aon Hewitt.

“Now that we have seen plan solvency decline for the first time in over a year and a half, hopefully this will serve as a wake-up call to all plan sponsors to consider their funding and investment strategies with risk management as their key objective,” he adds.

Aon Hewitt expects that actuarial standards for solvency valuations to be released in 2015 will take into account the new mortality tables released earlier this year. That will have a real impact on the solvency liabilities of DB plans.

The Canadian Institute of Actuaries’ (CIA) mortality tables project longer lifespans for Canadian pensioners than the previously used U.S. mortality tables. If the new CIA tables were applied to the Q3 survey, the firm would expect the solvency ratio of the median plan to be even lower (86.9% compared with 91.1%).

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