Canadian Defined Benefit Pension Plans' Solvency Improves Slightly in 2012, According to Aon Hewitt

Canadian Defined Benefit Pension Plans' Solvency Improves Slightly in 2012, 
According to Aon Hewitt 
TORONTO, Jan. 3, 2013 /CNW/ - Defined benefit (DB) pension plans' solvency in 
Canada improved slightly in2012 thanks to company contributions and a strong 
equity market, according to Aon Hewitt, the global human resource solutions 
business of Aon plc (NYSE:AON). The median pension solvency funded ratio - 
orthe ratio of the market value of plan assets to liabilities — is 
approximately 1 percent higher this year than at the start of 2012. 
According to Aon Hewitt, opposing factors had an overall positive impact on 
the financial status of defined benefit pension plans this year. On the one 
hand, interest rates continued their decline pushing up the value of 
liabilities of pension plans. The discount rate used to calculate the 
liabilities to be settled by annuity purchases in case of a plan termination 
went down from 3.31percent at the beginning of the year to2.96percent at 
the end of 2012. 
On the other hand, equities performed well, with Emerging Markets leading the 
pack at 16.0 percent, followedby International Equities (15.3 percent), US 
Equities (13.4 percent) and Canadian Equities (7.2percent). Pension plans 
invested in alternative asset classes such as Global Real Estate and 
Infrastructure were rewarded with returns of 25.8 percent and 11.7 percent 
respectively. Finally, most plan sponsors had to contribute towards their 
deficits due to minimum solvency funding requirements. 
The combination of all these factors led to a slight rise in Aon Hewitt's 
median solvency funded ratio ofalargesample ofpension plans from 68 
percent at the end of 2011 to 69 percent at the end of 2012. 
About97percent of pension plans in that sample had a solvency deficiency 
as at December 31, 2012. Thesolvency funded ratio measures the financial 
health of a defined benefit pension plan by comparing theamount ofassets 
to total pension liabilities in the event of a plan termination. 
"There are mainly three ways that plan sponsors will see themselves out of 
this solvency conundrum," said Thomas Ault, an associate partner in Aon 
Hewitt's Retirement Consulting practice. "Through an increase ininterest 
rates, favorable equity and alternative markets returns, or through higher 
employer contributions. We had two out of three this year." 
The following graph depicts the movement of assets, liabilities and funded 
ratios for this median pension plan since January 1, 2010. 
The graph shows that assets have only increased by 20 percent over the 
three-year period since January 1, 2010 whileliabilities, driven by a 
continuous drop in long term interest rates, have increased by 50 percent over 
Impact of de-risking
In addition to the performance of the typical plan, Aon Hewitt has also 
tracked the performance of a plan that has employed a few simple de-risking 
strategies since January 1, 2011, such as: 

    --  Increased investment in bonds from 40 percent to 60 percent of
        the portfolio
    --  Investment in long bonds instead of universe bonds to better
        match liabilities.

The de-risked plan experienced a 79 percent solvency ratio as at December 31, 
2012 as opposed to69 percent for the median plan.

Looking Ahead to 2013
According to Aon Hewitt, there was, again, downward pressure on yields in 
2012, and it is likely to continue in2013. "The demand on long bonds by 
pension funds and insurance companies to better hedge their liabilities, 
foreign investors looking for a safe haven and the level of public debt are 
all contributing factors tothis trend," said André Choquet, a senior 
consultant in Aon Hewitt's Investment Consulting Practice. "Plansponsors may 
want to review not only their investment policy but their benefit design and 
funding policies if they believe we're in this low rate environment for the 
long haul."

Aon Hewitt believes the following trends are likely to continue in 2013:
    --  Mega risk transfer deals: 2012 saw two large scale North
        American annuity buy-outs with GM and Verizon settling $26
        billion and $7.5 billion of their retiree liabilities
        respectively both with the same insurer, Prudential. Some plan
        sponsors that believe low interest rates are here to stay may
        opt to remove pension risk from their balance sheet as it
        negatively affects their stock price. Canadian insurers hope to
        see the first $1 billion buy-in or buy-out deal this year.
    --  Diversification out of equities: Plan sponsors who do not
        envision an early exit from their defined benefit plans, may
        opt to continue diversifying the growth component of their
        pension fund into alternatives and hedge funds mainly to reduce
        market risk while preserving their return expectation. Many
        alternative asset classes are now available to smaller
        investors through pooled funds.
    --  Delegation of responsibilities: Some sponsors concerned about
        the level of oversight and governance needed to effectively
        manage their defined benefit plans especially as they approach
        their endgame may choose to delegate some or most of their
        responsibilities to a third party who will then implement
        a de-risking and an eventual annuity settlement strategy.

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About AonHewitt 
AonHewitt is the global leader in human resources solutions.The company 
partners with organizations tosolve their most complex benefits, talent and 
related financial challenges, and improve business performance.AonHewitt 
designs, implements, communicates, and administers a wide range of human 
capital, retirement, investment management, health care, compensation and 
talent management strategies.Withmorethan 29,000 professionals in 90 
countries, AonHewitt makes the world a better place towork forclients 
and their employees. Formore information on AonHewitt, please visit

About Aon Aon plc NYSE:AON is the leading global provider of risk management, 
insurance and reinsurance brokerage, and human resources solutions and 
outsourcing services. Through its more than 62,000 colleagues worldwide, Aon 
unites to empower results for clients in over 120 countries via innovative and 
effective risk and people solutions and through industry-leading global 
resources and technical expertise. Aonhas been named repeatedly as the 
world's best broker, best insurance intermediary, reinsurance intermediary, 
captives manager and best employee benefits consulting firm by multiple 
industry sources. formoreinformation on Aon and to learn about Aon'sglobal partnership 
andshirt sponsorship with Manchester United.

Media Contact: Alexandre Daudelin │ +1.514.982.4910 

Image with caption: "Aon Hewitt Survey of Median Solvency Ratio 2010-2012 (CNW 
Group/AON Hewitt)". Image available at:


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CO: AON Hewitt
ST: Ontario

-0- Jan/03/2013 17:04 GMT

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