Canadian Defined Benefit Pension Plans' Solvency improves in the first quarter
of 2013, according to Aon Hewitt
TORONTO, April 2, 2013 /CNW/ - Defined benefit (DB) pension plan sponsors in
Canada have seen a marked increase in their solvency funding in the first
quarter of 2013 thanks to a combination of company contributions, a strong
equity market and a slight increase in interest rates, according to Aon
Hewitt, theglobal human resource solutions business of Aon plc (NYSE:AON).
The median pension solvency fundedratio - or the ratio ofthe market value
of plan assets to liabilities — is approximately five percentage points
higher at March 31, 2013 than at the start of the year.
According to Aon Hewitt, all of the major factors influencing pension plan
solvency position were favourable this quarter. Interest rates, while
remaining close to record low levels, reversed their seemingly constant
decline from the last few years. This pushed down the value of liabilities of
pension plans, improving funding. The discount rate used to calculate the
liabilities to be settled by annuity purchases in case of a plan termination
went up from 2.96 percent at the beginning of the year to 3.04 percent close
to the end ofthequarter.
Equities performed well, with US Equities leading the pack at 12.86 percent
for the quarter, followed byInternational Equities (7.27 percent), Canadian
Equities (3.34 percent) and Emerging Market Equities (0.38percent). Pension
plans invested in alternative asset classes such as Global Real Estate and
Infrastructure were rewarded with returns of 8.42 percent and 9.27 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 rise in Aon Hewitt's median
solvency funded ratio of a large sample ofpension plans from 69 percent at
the end of 2012 to 74 percent at March 31, 2013. About97percent
ofpension plans in that sample had a solvency deficiency as at March 31,
2013. The solvency funded ratio measures the financial health of a defined
benefit pension plan by comparing the amount ofassets to total pension
liabilities in the event of a plan termination.
"There are three main ways that plan sponsors will see themselves out of this
solvency conundrum," said IanStruthers, partner, Investment Consulting
Practice, Aon Hewitt Canada. "Through an increase in interest rates, favorable
equity and alternative markets returns, and/or through higher employer
contributions. We saw all three last quarter."
The graph above depicts the movement of assets, liabilities and funded ratios
for this median pension plan since January 1, 2010.
We can see that assets have only increased by 26 percent over the three-year
and three month period since December 31, 2009 whileliabilities, driven by a
continuous drop in long-term interest rates, have increased by46 percent
Impact of de-risking
As well as 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,
-- Increased investment in bonds from 40 percent to 60 percent of
-- Investment in long bonds instead of universe bonds to better
The de-risked plan would have experienced an 82 percent solvency ratio as at
March 31, 2013 as opposed to74 percent for the median plan.
"There are many ways to de-risk a portfolio and it is especially important to
have a strategy when there is uncertainty around market direction," concluded
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Media Contact: Alexandre Daudelin │ +1.514.982.4910
Image with caption: "Aon Hewitt Survey of Median Solvency Ratio 2010-2013 (CNW
Group/AON Hewitt)". Image available at:
SOURCE: AON Hewitt
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