SOURCE: Aon Hewitt

Aon Hewitt

March 31, 2015 14:24 ET

Solvency of Canadian Pension Plans Falls to Lowest Level Since 2013, According to Aon Hewitt's Latest Quarterly Survey

In Third Consecutive Quarter of Decline, Lower Interest Rates Drive Solvency Ratio Below 90%

TORONTO, ON--(Marketwired - March 31, 2015) - The health of Canadian defined benefit (DB) pension plans has continued to decline in 2015, according to the latest pension plan solvency ratio survey by Aon Hewitt, the global talent, retirement and health solutions business of Aon plc (NYSE: AON). The quarterly survey, which assesses the financial health of pension plans by measuring their market value of assets over liabilities, found that the median solvency ratio not only fell for the third quarter in a row, but dropped below 90% for the first time since September 2013.

A total of 449 Aon Hewitt-administered DB pension plans from the public, semi-public and private sectors participated in the survey. On March 30, 2015, the median solvency funded ratio stood at 89% -- a two-percentage-point decline from the previous quarter, and a six-point drop from a year ago. Only 18% of surveyed plans were more than fully funded at the end of Q1, roughly equivalent to the previous quarter, but down significantly year-over-year.

The key drivers of lower solvency were declining long-term interest rates and the corresponding decrease in discount rates used to value plan liabilities. Following significant volatility in 2014, interest rates fell dramatically in the first quarter, as 10-year bond yields dropped by about 40 basis points. Countering the difficult rate environment was the performance of U.S. equities (9.3%) and global equities (11.4%), and to a lesser extent Canadian equities (2%).

By historical standards, overall plan solvency remains strong, and well above the recent low-water mark of 66% set in 2012 (see chart below). As well, plan sponsors who took advantage of their relatively robust positions by adopting de-risking strategies, such as delegating investment oversight and decision-making to an Outsourced Chief Investment Officer (OCIO), bucked the downward trend and saw solvency increase for the second quarter in a row.

"Falling interest rates are adversely affecting the health of traditional DB plans, but we are seeing a clear picture emerge of the benefits of taking a different course and adopting de-risking strategies," said William da Silva, Senior Partner, Retirement Practice, Aon Hewitt. "The evidence of the past few quarters shows that stronger risk management can help Canadian pension plans weather the storm of market and interest rate volatility, and enable them to better meet their obligations over the long term. In fact, while the financial health of surveyed plans decreased overall during Q1 2015, the median solvency ratio of those clients who have delegated execution of their risk management strategy to us increased by 1.4 percentage points."

Traditional DB plans typically have a 60/40 equity-bond mix. Plans that have adopted de-risking strategies seek broader diversification through allocations to asset classes like hedge funds, real estate and infrastructure. These assets produce stable returns over time and have lower correlation to equity markets. Hedge funds target low-volatility, absolute returns, and have had a very low correlation to traditional equity classes. Global REITs and infrastructure assets, meanwhile, have offered excellent returns (13.5% and 10.5%, respectively, in Q1 2015) and additional diversification.

"Gaining exposure to non-traditional asset classes can effectively mitigate risk and achieve portfolio diversification beyond bonds and equities," said Ian Struthers, Partner, Investment Consulting Practice, Aon Hewitt. "Combining this with a strong governance process that dynamically reassess risk is very powerful. We have seen plans materially outperform by taking advantage of gains in value, to manage asset allocations and shift from return-seeking assets to interest rate hedging strategies. They protect their gains. There are different options for implementation, from following a clear investment policy to adopting an OCIO model."

The solvency funded ratio measures the financial health of a defined benefit plan by comparing total assets to total pension liabilities in the event of plan termination. Aon Hewitt's median pension solvency ratio is the most accurate and timely representation of the financial condition of Canadian DB plans because it draws on a large database and reflects each plan's specific features, investment policy, contributions and solvency relief steps taken by the plan sponsor.

About Aon Hewitt's Median Solvency Ratio

Aon Hewitt's Median Solvency Ratio is developed using a database of 449 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 66,000 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, best reinsurance intermediary, best captives manager, and best employee benefits consulting firm by multiple industry sources. Visit aon.com for more information on Aon and aon.com/manchesterunited to learn about Aon's global partnership with Manchester United.

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Contact Information

  • For further information please contact:

    Aon Hewitt media team
    Rosa Damonte
    +1.416.227.5718

    Alexandre Daudelin
    +1.514.982.4910