SOURCE: Aon Hewitt

Aon Hewitt

March 31, 2014 16:30 ET

Canadian Defined Benefit Plans Slightly More Solvent in First Quarter, Aon Hewitt Survey Finds

Canada's Most Comprehensive Report on DB Plan Solvency Shows Continued Improvement, but Growing Volatility Risk

TORONTO, ON--(Marketwired - March 31, 2014) - Driven by robust equity market returns, the financial health of Canadian defined benefit (DB) plans continued to improve in the first quarter of 2014, according to the latest survey by Aon Hewitt, the global human resources solutions business of Aon plc (NYSE: AON).

For the more than 275 Aon Hewitt administered pension plans from the public, semi-public and private sectors that participated in the survey, the median solvency funded ratio -- the market value of plan assets over plan liabilities -- stood at 95.4% at March 27, 2014. That represents an improvement of 2 percentage point increase over the previous quarter ended Dec. 31, 2013, and a significant 21 point increase from the same quarter in 2013. Approximately 36% percent of the surveyed plans were more than fully funded at the end of the quarter, compared with 26% in the previous quarter and 3% in Q1 2013.

"What we have seen in Q1 is a continued improvement in financial health of Canadian pension plans in line with what we saw in 2013," said William da Silva, Senior Partner, Retirement Practice, Aon Hewitt. "Clearly, that's good news for plan sponsors and members in the short term. But volatility in the capital markets still exists. As before, we think the current strong financial health of DB plans should encourage plan sponsors to truly understand their risks and to potentially rethink their funding and investment strategies to manage these risks.

"Every plan sponsor should be re-evaluating their risks and strategizing on how to take advantage of the continued good performance of their plans. This goes for those that may already have a plan in place as there continues to be new developments in the marketplace for pension risk management that could potentially create opportunities to modify their strategies. Whether that's considering such end-game options as full immunization of assets to liabilities, partial settlement and full plan wind-up, or at minimum analyzing their plan's risk profile in light of changes in the capital markets, the time for plan sponsors to act is now."

The primary driver of solvency improvement in the first quarter was the strong performance of North American equity markets, with Canadian equities returning 4.9% and U.S. equities returning 4.6%. As well, alternative asset classes generated healthy returns, as the UBS Global Infrastructure & Utilities 50-50 Index gained more than 10.1% and global real estate returning 6.6%.

Those returns helped offset declining yields in benchmark bonds and continuing weakness in emerging markets (which earned 1.5% in the first quarter). Notably, the declining Canadian dollar also contributed significantly to better financial returns for the plans by increasing the domestic market value of U.S. assets.

"Strong equity market returns have been positive for DB plans, but that's not the only story," said Ian Struthers, Partner, Investment Consulting Practice, Aon Hewitt. "Last year we saw improvements across the board from strong market returns, increased contributions and higher interest rates. Today, we're seeing a more dynamic world, which creates volatility. While Q1 was positive, we saw downside from benchmark yields and emerging markets. Currency volatility was a positive or negative depending on how a plan was positioned. Currencies will remain volatile and in an uncertain world understanding risk and investment strategy is critical."

About Aon Hewitt's Median Solvency Ratio
Aon Hewitt's Median Solvency Ratio is developed using a database of more than 275 pension plans from all sectors (public, semi-public and private) and from most Canadian provinces. Each plan's characteristics and data are used to project their solvency ratio on a monthly basis. These projections take into account the increase in financial indices for various asset classes, as well as the applicable interest rates to value liabilities on a solvency basis.

About Aon Hewitt
Aon Hewitt empowers organizations and individuals to secure a better future through innovative talent, retirement and health solutions. We advise, design and execute a wide range of solutions that enable clients to cultivate talent to drive organizational and personal performance and growth, navigate retirement risk while providing new levels of financial security, and redefine health solutions for greater choice, affordability and wellness. Aon Hewitt is the global leader in human resource solutions, with over 30,000 professionals in 90 countries serving more than 20,000 clients worldwide. For more information on Aon Hewitt, please visit www.aonhewitt.com.

About Aon
Aon plc (NYSE: AON) is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 65,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.

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