The solvency of Canadian DB plans declined through 2014 due to a decrease in long-term interest rates.
The median solvency ratio of of 449 Aon Hewitt administered pension plans from the public, semi-public and private sectors stood at 90.6% at Dec. 31, 2014.
That represents a decline of 0.5 percentage points over the previous quarter ended Sept. 30, 2014, and a 2.7 percentage-point drop from plan solvency at Dec. 31, 2013.
Since peaking at 96.6% in April 2014, overall plan solvency has declined by 5.9 percentage points, continuing the trend towards worsening plan solvency that began in the third quarter of 2014 (when the solvency ratio dropped to 91.1% from 96.2% in the previous quarter).
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About 18.5% of plans were more than fully funded at the end of the year, compared with 23% in the previous quarter and 26% at the end of 2013. Plan sponsors that must file valuations as at Dec. 31, 2014 could see the amount of their deficiency contributions double in 2015 as a result of the lower solvency ratio, says Aon Hewitt.
Long-term interest rates experienced significant volatility in 2014, with an overall decline of nearly a percentage point. Overall, the year demonstrated that amid market volatility, pension plans that have adopted a de-risking strategy which partly mitigates interest rate risk perform better than pension plans that continue to take interest rate risk.
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“Plans that stayed exposed to interest rates really took a beating in 2014,” says William da Silva, senior partner, retirement practice with Aon Hewitt. “Those plan sponsors who have implemented or fine-tuned their risk management strategies performed much better than traditional plans amid interest rate declines.”
He adds that the imperative for plan sponsors to re-evaluate their approach to risk management is even more crucial in 2015 with the pending introduction of new mortality tables for the Canadian market, which when implemented may have a significant impact on plan solvency.
Aon Hewitt says the new mortality tables from the Canadian Institute of Actuaries could result in a decline in median plan solvency of more than four percentage points.
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