For the first time since the Financial Services Commission of Ontario began monitoring defined benefit pension solvency in 2009, the province’s DB plans posted a median solvency ratio above 100 per cent in the third quarter of 2018.
As of Sept. 30, the solvency ratio reached 101 per cent, up from 97 per cent the previous quarter. The FSCO attributed the improved status mainly to the reduced liabilities stemming from higher long-term Canadian bond yields. Conversely, Canadian equities suffered from the uncertainty surrounding U.S. trade negotiations. Results were stronger for U.S. equities, while global markets were weaker.
Despite a rough October, Aon’s solvency ratio for Canadian defined benefit pensions also maintained more than 100 per cent solvency on average, at 100.8 per cent as of Nov. 1, 2018, but down 2.4 per cent from September.
Read: Canadian DB pension plans see weak but positive gains in Q3
“The risk-off sentiment that set in for much of October bit into pension asset returns, but higher bond yields and already-strong funded positions curbed the damage to pension solvency,” said Calum Mackenzie, partner and head of investment for Canada at Aon, in a press release. “However, while markets recovered modestly as the month ended, they seem to be entering what could be a lengthy period of heightened volatility, as investors reset to a higher interest rate environment and uncertainties over global trade and growth continue to loom.
“One challenge for plan sponsors is that correlations between asset classes can increase in times of distress, making diversification and risk mitigation difficult,” he added. “Our message to plan sponsors remains unchanged. We believe they need to act now to leverage their strong funded positions and consider new and more robust ways to diversify and manage risk.”
All risk-seeking and fixed-income asset classes suffered during the last quarter, noted Aon, resulting in a five per cent decline in gross pension assets. Emerging market and international equities led the decline, while alternative asset classes suffered more modest declines. Canadian long-term bond yields also rose in October, although not as much as in September.
Read: Canadian DB pensions reach highest solvency in nearly two decades
Also, the Royal Bank of Canada’s pension universe saw a small but positive overall return of 0.1 per cent, down from its 2.2 per cent return in the previous quarter.
“Despite a lacklustre quarter for Canadian equities, Canadian pension returns remain in positive territory for 2018 at 6.7 per cent for the year,” said Ryan Silva, director and head of pension and insurance segments and global client coverage for RBC Investor and Treasury Services. “Interest rate hikes and free trade negotiations weighed on Canadian indices and impacted returns this quarter. However, the newly negotiated United States Mexico Canada Agreement should provide some relief in Q4 2018.
“Conversely, as we head into the final quarter of the year, ongoing geopolitical concerns, interest rate anxieties globally and an economic slowdown in China shouldn’t be ignored. Asset managers will need to maintain their vigilance to the ongoing volatility and retain a diversified portfolio to actively manage their risk exposure.”
Read: U.S. Fed, trade wars biggest current market factors for institutional investors