Although the funding level of Canadian defined benefit pension plans improved in the second quarter despite increased market volatility, the biggest risk they face is complacency, according to a recent report from professional services firm Aon Canada.
Aon’s quarterly median solvency ratio rose 1.5 percentage points to 100.2% as of June 29 compared to the previous quarter. Aon also found that most plans are now more than fully funded, as the proportion of this group increased to 50.8% at the end of the second quarter, up from 45.8% at the end of the first quarter. Pension assets during the quarter increased 1.15%, after declining 0.4% in the previous quarter.
“Defined benefit pension plans have fared remarkably well during a period defined by worrisome headlines and rising international tensions,” William da Silva, a senior partner and retirement practice director at Aon, said in a release. “While the Aon Median Solvency Ratio improved quarter-over-quarter, we’ve seen some fairly significant variations in the measure over the past few months.”
For example, Silva said, there’s been a decline of 150 basis points in the median solvency ratio from a high of 101.7% at the end of April.
“It wouldn’t take much to see all of this year’s solvency gains erased—and quickly,” warned da Silva, who added that plan sponsors should consider steps to implement or update their risk management strategies. “In the past, many sponsors have been reluctant to do so because of the actual or opportunity costs involved, but with solvency strong and risks on the horizon, they no longer have a reason not to act.”
According to Aon, equity markets have seen a 50% increase in volatility so far in 2018 over last year. However, the uncertainty applies not only to stocks—bond yields fluctuated by almost 50 basis points through the second quarter, and basically ended up where they began, said Aon.
“We noted at the end of the first quarter that markets had entered a more volatile investment environment, and the second quarter confirmed it,” Ian Struthers, a partner and investment consulting practice director at Aon, said in a release.
Struthers said there is likely to be more volatility during the remainder of the year as central banks adjust toward higher interest rates, trade tensions rise, and geopolitical factors influence commodity prices.
“In this environment, it only makes sense for pension plan sponsors to take advantage of their strong funded positions, lock in some gains, and take concrete steps to strengthen risk management going forward,” he said.