The median solvency ratio of Canadian defined benefit pension plans declined in the second quarter of 2017 compared to a post-recession high set in Q1 2017, says Aon’s most recent quarterly survey.

Aon’s median solvency ratio was 94.8 per cent as of June 30, 2017, down from 96.7 per cent on April 1, 2017.

The second quarter decline is due to falling interest rates that were offset slightly by asset returns, says Aon. The average Canadian pension saw a return of 1.6 per cent for Q2. Interest rates are expected to rise over this year, so bonds have been sold off in response, lowering pension returns. However, a rise in yields should support solvency going forward, says the report.

Manage and optimize risks

“We were concerned last quarter that the market conditions leading to record solvency levels might not last long, and it looks like our concern has played out in markets, especially in June,” says William da Silva, senior partner and Retirement Practice director at Aon Hewitt. “For pension plan sponsors, the takeaway now is the same, only more urgent: with plans still in strong financial shape, they should consider steps to manage and optimize the risks within their plans.”

Goldilocks state

“For much of the past year, capital markets were in a Goldilocks state, but the landscape changed in June,” says Ian Struthers, partner and Investment Consulting Practice director at Aon Hewitt. “The equity rally appears to have softened in June, while central banks, including the Bank of Canada, seem in the mood to raise interest rates.”