The health of Canadian pension plans declined sharply in the third quarter due to market volatility and declining bond yields, reports from Aon and Mercer say.
The median solvency ratio was 87.6% on Sept. 24, a 5.3 percentage point decrease from the previous quarter, says Aon.
Only 13.6% of surveyed plans were more than fully funded for the quarter, down 12.9 percentage points from the previous quarter.
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Pension health has now declined in four of the last five quarters, resulting in a median solvency that’s lower than it was a year ago (91.1%).
“Well-diversified plans—even those with majority exposure to Canadian assets—can better weather the downdraft in Canada’s economy because they are less exposed to market fluctuations, and therefore can achieve more stable returns over the long term,” says Ian Struthers, a partner in Aon Hewitt’s investment consulting practice.
Separately, the Mercer Pension Health Index, which represents the solvency ratio of a hypothetical plan, stood at 93% on Sept. 24, down from 98% at the end of June and 94% at the beginning of the year.
The median solvency ratio of the pension plans of Mercer clients stood at 87%, down from 92% at the beginning of the third quarter, and 90% at the beginning of the year.
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“Both the key drivers of pension health—equity market returns and long-term interest rates—went in the wrong direction over the summer,” says Manuel Monteiro, leader of Mercer’s financial strategy group.
For plans which do not hedge their foreign asset exposure, the drop in solvency ratio was somewhat buffered by the continued decline in the Canadian dollar.
Both firms say the solvency position of pension plans will likely be impacted by the introduction of new mortality tables from the Canadian Institute of Actuaries, which is expected on Oct. 1.
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