Canadian Investment Review

Ontario DB plans’ solvency drops in last quarter of 2018: FSCO

Written by Benefits Canada Staff on Wednesday, February 20th, 2019 at 2:07 pm

Solvency on red background. © lkeskinen /123RF Stock PhotosOntario’s defined benefit pension plans had a median solvency ratio of 94 per cent at the end of 2018, according to the Financial Services Commission of Ontario’s latest report.

The median ratio represents a decline from the previous quarter, which sat at 101 per cent as of Sept. 30, 2018. More than half (53.9 per cent) of plans had a solvency ratio between 85 and 100 per cent, while 27.5 per cent had more than 100 per cent. Some 18.6 per cent had a ratio under 85 per cent, compared to 8.2 per cent in the previous quarter.

The pension funds suffered a double hit to their solvency rates due to negative investment returns, along with increased solvency liabilities because of the decrease in longer-term Canadian bond yields. Canada’s yield curve has been flat since June of last year, closing in on inversion.

Indeed, the S&P/TSX composite pulled back during the quarter, posting a 10.1 per cent loss, while returns from U.S. markets and those further afield also disappointed, with the MSCI world equities index shedding 8.5 per cent during the quarter.

These poor returns were offset slightly by fixed income assets, which picked up during the quarter, with the FTSE TMX universe up 1.8 per cent. As well, TMX long-term bonds were up 1.9 per cent. Overall, DB pensions saw a return of negative 4.3 per cent after expenses, dragging the overall year’s returns down to negative 1.7 per cent.

For further context, the report noted Canada’s economic activity has been strong, but geopolitical uncertainty may cause interest rates to drift downwards after a series of upticks. In particular, the potential for political deadlock and a government shutdown in the U.S., trade tensions between the U.S. and China, uncertainty over Brexit, France’s political upheaval, continuing conflict in the Middle East, as well as the potential for further instability between Ukraine and Russia are of major concern for markets.

This article originally appeared on CIR’s companion site, Read the full story here.

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