FSRA estimating jump in DB pension solvency off rebound in markets

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The median projected solvency ratio for Ontario’s defined benefit pension plans increased to 90 per cent at the end of 2020’s second quarter, up from 85 per cent in the first quarter, as measured by the Financial Services Regulatory Authority of Ontario.

The regulator estimated about three-quarters of plans had double-digit investment returns for the quarter, partially offset by a drop in solvency discount rates. Net of fees, the estimated return stood at 10.9 per cent and 11.1 per cent before expenses.

Just 26 per cent of pensions are projected to be fully funded on a solvency basis as of the end of the second quarter, while 36 per cent are projected to have a ratio below 85 per cent.

“The World Health Organization declared the COVID-19 outbreak as a pandemic on March 11, 2020 and global equity market indices dropped sharply to their lowest levels of the year just before the March 31, 2020 quarter end,” noted a report from the FSRA. “Fortunately, fears of continued deterioration did not materialize and capital markets rallied in Q2 2020, even as the economy was constrained by efforts to contain the outbreak.

“Despite the rebound in asset values this past quarter, the vast majority of plans opened the year in a stronger funded position on a solvency basis. Many plan administrators are reviewing or have reviewed their funding and investment strategies so they can prudently manage their plans through the cycle — those who have not are strongly urged to do so.”

As well, the commuted value discount rate applicable in the first 10 years reached historic lows for the quarter, falling 0.8 per cent. “However, the solvency discount rates applicable for longer durations were relatively flat,” said the report.

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