Canadian defined benefit pension plans’ solvency position rose in the first quarter of 2019, according to two new pension indexes.
Representing the solvency ratio of a hypothetical plan, Mercer Canada’s index sat at 106 per cent on March 31, up from 102 per cent at the start of the year. The median solvency ratio of Mercer clients’ pension plans was 97 per cent on March 31, up from 95 per cent at the end of 2018. It also found almost one out of every two Canadian pension plans was fully funded and less than five per cent are below 80 per cent funded on a solvency basis.
During the first quarter, double-digit equity market returns went a long way to reviving the funded position of pension plans, according to Mercer Canada.
“Although many pension plans ended Q1 2019 at or close to a fully funded state, the volatility over the last few months has spooked plan sponsors and served as a reminder of how fleeting a fully funded position can be,” said Andrew Whale, principal in Mercer Canada’s financial strategy group, in a release. “Rather than sit tight, many view the sudden drop and immediate recovery as a catalyst to take action and right-size the risk held in the plan.”
A typical balanced pension portfolio would have risen by nine per cent during the first quarter of 2019, noted the release. The quarter saw the S&P/TSX composite index post a 13.3 per cent return, gaining back losses posted at the beginning of the year.
Canadian fixed income markets improved over the quarter, as well, with long-term bonds (6.9 per cent) outperforming universe bonds (3.9 per cent). Real-return bonds (5.1 per cent) also rose.
“Although global financial markets are more settled than they were in the fourth quarter, investors still remain wary amid slowing economic growth in the global economy,” said Todd Nelson, partner at Mercer Canada. “This economic softening combined with political uncertainty saw central banks slow their tightening path from 2018.”
Aon’s latest survey also found a similar rebound in the median solvency ratio at the end of the first quarter of 2019, at 98.5 per cent.
“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 and head of investment in Canada for Aon, in a release. “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, he noted, may not only raise pension plan liabilities, but also lower 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.”