News from Aon Canada
Financial health of defined benefit pension plans rebounds to start 2019
Aon’s Median Solvency Ratio at end of Q1 2019 stood at 98.5%
TORONTO (April 2, 2019) – The solvency positions of Canadian defined benefit pension plans rebounded along with stock markets in the first quarter of 2019, once again nearing 100%, according to Aon plc (NYSE:AON), the leading global professional services firm providing a broad range of risk, retirement and health solutions. The late-2018 equity selloff meant pension plans’ financial health capped last year in decline, but the first-quarter equity rally saw the Aon Median Solvency Ratio erase those losses.
“The first quarter was very good for pension asset returns, particularly coming on the heels of a year that most institutional investors would rather forget,” said Calum Mackenzie, Partner, Head of Investment, Canada, for Aon. “Domestic and global equity markets rallied, while the volatility that marked the fourth quarter of 2018 receded. The question is, what now? Bond yields are falling, and a flattening yield curve is signalling caution for economic and market conditions going forward. That trend might not only raise pension plan liabilities, but also diminish expected risk-asset returns through the year. Market volatility is unlikely to stay missing-in-action for long, given continuing uncertainty over developed-market monetary policy, global economic growth and political risk. While the first quarter in 2019 was positive, many plan sponsors continue to be complacent and play the waiting game. However, given the economic backdrop, we believe it’s prudent for plan sponsors to revisit investment strategies to ensure gains made in recent years are not eroded.”
“The market rebound in Q1 has given pension plan sponsors another opportunity to get tactical in managing risk,” said William da Silva, Senior Partner and Retirement Practice Director at Aon. “In the wake of a nasty end to 2018, many feared that they had lost the chance to lock in gains by de-risking their asset mix or tapping the annuity market. Now that a strong Q1 has given a reprieve from Q4’s underperformance, plan sponsors are once again in a position to be proactive about risk, but the time to act is now.”
- Aon’s Median Solvency Ratio increased 3.3 percentage points in the first quarter of 2019.
- 47% of plans were fully funded as of April 1, 2019, up 8.5 percentage points since the end of Q4 2018.
- As they did last quarter, Canadian bond yields fell in Q1 2019, with Canada 10-year yields down 34 basis points and Canada long bond yields down 28 bps. Lower yields increase pension plan liabilities, representing a headwind for plan solvency.
- Pension assets returned 8.5% in the quarter.
- In Canadian dollar terms, all equity indices had positive returns in Q1, led by the Canadian S&P/TSX composite (+13.3%), the U.S. S&P 500 (+11.2%) and the global MSCI World (+10.0%) indices. Meanwhile, the MSCI Emerging Markets and international MSCI EAFE indices rose by 7.5% and 7.6%, respectively.
- Real asset returns kept pace with equities in the quarter. Global infrastructure rose by 11.4% while global real estate rose 12.1%.
- In fixed income, falling bond yields saw prices and returns rise. The FTSE TMX Long Term Bond Index rose by 6.9%, while the FTSE TMX Universe index rose by 3.9%.
About Aon’s median solvency ratio survey
Aon’s median solvency ratio measures the financial health of a defined benefit plan by comparing total assets to total pension liabilities on a solvency basis according to the different legislations. It is the most accurate and timely representation of the financial condition of Canadian DB plans because it draws on a large database and reflects each plan’s specific features, investment policy, contributions and solvency relief steps taken by the plan sponsor. The analysis of the plans in the database takes into account the index performance of various asset classes, as well as the applicable interest rates to value liabilities on a solvency basis.
Aon's Median Solvency Ratio
For further information please contact the Aon media team: Alexandre Daudelin, +1.514.982.4910.