The median solvency ratio of Canadian defined benefit pension plans declined to 96.5 per cent in August, amid rising global political instability and subdued equity market returns, according to Aon Hewitt.
Its monthly survey, which tracks the performance of the defined benefit plans it administers and calculates their solvency ratios by measuring assets over liabilities, found 38 per cent of plans were more than fully funded as of Sept. 1, down 4.8 percentage points compared to Aug. 1.
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The survey also found the plans’ gross asset return was 1.2 per cent, in Canadian dollar terms, at the end of August. Meanwhile, emerging market equities returned 2.5 per cent, while other equity classes, such as Canadian stocks (0.7 per cent) and U.S. equities (0.6 per cent) posted more modest returns.
Among alternative asset classes, infrastructure returns were strong at 2.4 per cent and global real estate returned 0.4 per cent. Also, as bond yields fell, fixed-income returns increased. And the impact of lower bond yields decreased annuity purchase rates, effectively increasing pension liabilities and having an adverse impact on solvency levels.
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“On the one hand, August demonstrated how susceptible pensions can be to global market disruptions, which came last month in the form of escalating U.S.-North Korea tensions and hurricane Harvey in Texas,” said Ian Struthers, a partner and director of Aon Hewitt’s investment consulting practice.
“Not only did those developments depress market returns, but they also suppressed yields as investors flew to the relative safety of bonds despite the Bank of Canada’s recent rate increase. On the other hand, pension solvency remains near post-recession record levels, and plan sponsors remain in a strong position to take steps now to mitigate risk, whether that’s through hedging, portfolio diversification or other de-risking strategies.”
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