Canadian defined benefit (DB) pension plans are in the best shape they have been in for two and a half years. More than one in three plans are now fully funded.
Each month, consulting firm Aon Hewitt measures the assets over the liabilities of the more than 400 DB pension plans it administers in the public, semi-public, and private sectors. The most recent survey shows that the median solvency ratio for these Canadian DB plans on January 1, 2017 was 94.9%, up 8.8% year-over-year from the 86.1% reported at the beginning of January 2016. Aon Hewitt notes that 35.2% of the plans ended 2016 fully funded, up significantly from the 10.7% that were fully funded at the beginning of the year.
Gains in equity and alternative assets
Two-thirds of this overall improvement in pension plan solvency may be attributed to gains in equity and alternative assets, especially the S&P/TSX in Canada (up by 4.5% in Q4, for a 21.1% year-to-date return) and the U.S. S&P 500 (up 5.9% in Q4 for a 8.1% YTD gain when measured in Canadian dollars). However, it was bonds that really helped to push Canadian DB pension plans over the finish line; yields soared by nearly 80 basis during the last three months of the year and were responsible for 75% of the solvency improvement in Q4.
“2016 was a remarkable turnaround story”
“2016 was a remarkable turnaround story for markets and for Canadian DB pension plans, whose solvency ratio had been declining for much of the year,” comments Ian Struthers, Partner and Investment Consulting Practice Director at Aon Hewitt. “The fourth quarter made all the difference and it was not all about the U.S. equity market rally. The steep rise in bond yields since September, and the robust equity markets despite Brexit had a remarkably positive impact on pension solvency.”