Canadian Defined Benefit Plans Surge at End of 2019

Rising bond yields, strong asset returns bring funded ratio to near all-time high.

The funded ratio of Canadian defined benefit pension plans surged in the fourth quarter of 2019 to a near all-time high of 102.5%, thanks to rising bond yields and a late-year equity rally.

According to professional services firm Aon, its Median Solvency Ratio, which measures defined benefit plans’ financial health by comparing assets to liabilities, was up 7.2 percentage points in 2019.

The sharp increase in funded levels was attributed to Canadian bond yields, which rose during the quarter. The Canada benchmark 10-year yields were up 33 basis points, and the Canada benchmark long-bond yields were up 23 basis points. Because higher yields decrease plan liabilities, they had a positive impact pension solvency during the quarter.

At the same time, the funded levels were also boosted by strong returns on assets for pensions, which was 1.9% in the fourth quarter. That brought the overall return on assets for the year to a robust 15.9%.

“Financial markets began 2019 still recovering from a rocky year, and equities climbed a wall of uncertainty throughout much of the year,” Erwan Pirou, Aon’s Canada CIO, said in a release.

Pirou said, however, that the firm is “not so confident” the renewed optimism will continue in 2020 as “global growth remains a headwind to stock valuations, and the forces driving a reorientation of global trade and other economic relationships are still in play, suggesting more volatility ahead.”

Aon reported that all equity classes, in Canadian dollar terms, had positive returns during the fourth quarter and for the year. During the final quarter, the MSCI Emerging Markets index was the top performer, increasing 9.5%, followed by the US S&P 500, the global MSCI World index, the international MSCI EAFE index, and the Canadian S&P/TSX composite, which rose 6.8%, 6.3%, 5.9%, and 3.2% respectively.

For the year, the US S&P 500 was the top performer, rising 24.8%, followed by the Canadian S&P/TSX (22.9%), the global MSCI World (21.2%), the international MSCI EAFE (15.9%) and the MSCI Emerging Markets (12.4%).

Aon said that because of the financial strength of Canadian pension plans, plan sponsors may want to consider risk mitigation strategies for 2020.

“Plan sponsors need to separate recent events from long-term trends, and that’s nowhere more applicable than when it comes to bond yields,” said William da Silva, a senior partner at Aon. “Strong solvency positions give plan sponsors an opportunity to put all of their options for managing volatility and risk on the table, from diversification and outsourced investment solutions to full settlement of liabilities.”

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