Pension solvency inches up: Aon

The proportion of pension plans above full funding also increased, rising to 50.8 per cent from 45.8 per cent earlier in the year.

“Defined benefit pension plans have fared remarkably well during a period defined by worrisome headlines and rising international tensions,” said William da Silva, senior partner and retirement practice director at Aon, in a press release. “Now, complacency is the biggest risk.

“While the Aon median solvency ratio improved quarter-over-quarter, we’ve seen some fairly significant variations in the measure over the past few months — in fact, we’ve seen a decline of 150 basis points in the median solvency ratio from a high point of 101.7 per cent at the end of April. In short, it wouldn’t take much to see all of this year’s solvency gains erased — and quickly.”

Overall pension assets increased in the second quarter by 1.2 per cent, reversing the negative 0.4 per cent return of the previous quarter.

As for specific asset classes, bonds finished the quarter with only minor changes after some significant fluctuation. Canada 10-year yields ended eight basis points higher, for example.

Canadian and U.S. stocks buoyed returns, while emerging market equities posted negative results overall, falling 6.1 per cent during the quarter. When it comes to equities, trade tensions and anticipated market volatility will be strong headwinds as pension funds face the second half of the year, according to Aon.

In Canadian-dollar terms, both global infrastructure and real estate contributed positively to the quarter, earning returns of 4.3 per cent and 7.3 per cent, respectively.

“We noted at the end of the first quarter that markets had entered a more volatile investment environment, and the second quarter confirmed it. In equity markets, we’ve seen about a 50 per cent increase in volatility so far in 2018 over last year, but the uncertainty applies beyond stocks,” said Ian Struthers, a partner and investment consulting practice director at Aon, in the news release.

“Bond yields fluctuated by almost 50 basis points through the second quarter — and ended up pretty much where they began. There is likely more volatility to come, as central banks continue to recalibrate towards a higher-interest-rate world, as trade tensions rise globally and as geopolitical factors influence commodity prices. In this environment, it only makes sense for pension plan sponsors to take advantage of their strong funded positions, lock in some gains and take concrete steps to strengthen risk management going forward.”