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The solvency of the pension plan stays the course


Frédérique De Simone

July 4, 2019 09:30

Photo : Freepik

The level of solvency of the pension plan canadian defined benefit remains unchanged in the second quarter of 2019, according to the index Mercer of the financial health of pension plans, published on 2 July.

The solvency ratio of the pension plans remains equal to 106 % in the second quarter, the same level as in the first quarter. However, this result marks an increase compared to the beginning of the year 2019, or the ratio was 102 %.

The perfect balance almost reached

A scenario similar to the solvency ratio of the median pension of the clients. It remains unchanged at 97 % since the end of the first quarter at Mercer. While on the side ofAon, the solvency ratio of the median has increased from 98.5% in the first quarter to 99.3% at the end of the month of June.

The solvency median remains high by historical standards. “Given the fast changing conditions of the market, the process of governance must be flexible, because of the opportunities — and risks — arise and disappear suddenly. The pension plans must be able to react quickly to take advantage of that, ” said Claude Lockhead, partner, executive practice, retirement and investments, Canada, Aon.

Funded status of the plans

“The level of pension funding has reached a peak at the end of April before falling back due to the continued decrease in interest rates,” says Mercer. The positive returns in equity markets have helped prevent the fall of the level of funding, ” adds the consultancy.

Nearly half of the canadian pension plans are fully funded, or 48.2% of plans, according to Aon. An increase of 1.2 percentage points since the end of the first quarter. Mercer adds that 3 % of plans have a capitalization of less than 80 %, according to the approach of solvency.

His eyes glued to the promoters

Due to the falling bond yields, the pension plan sponsors should prepare for volatility next, suggests Aon during the unveiling of its results. “There may be volteface. In six months, we have moved from an environment of increasing yield, which reduces the liabilities of pension funds, in an environment with diminishing returns, increasing liabilities, ” says Erwan Pirou, the director of investments for solutions that are delegated to Aon.

“Even if the recent legislation on the funding of pension plans in Ontario and Quebec can address the volatility of the contributions, the obligations under the plans and the exposure to risks connected with it are still important to a large number of promoters “, adds F. Hubert Tremblay, senior adviser of the domain assets of Mercer Canada.

And since the level of pension funding remains high, their promoters, in particular those defined benefit plans that have been closed or frozen, should re-evaluate their risk reduction strategies, and ascertain where they are in the execution of their plan, says Mercer.

“Over the past two decades, a good number of systemic factors have led proponents of defined benefit plans to reduce the risks, primarily to reduce interest rates, which has directly increased the plan obligations,” continued Mr. Tremblay.

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