Interest rates, contributions favourable
Defined benefit (DB) pension plan sponsors in Canada saw a marked improvement in their solvency funding in the second quarter of 2013, despite bond and equity markets falling, according to the latest survey by Aon Hewitt.
The median pension solvency funded ratio, or the ratio of the market value of plan assets to liabilities, was about three percentage points higher at the end of June than at the end of March 2013. This improvement is mainly the result of the 70 basis point rise in interest rates seen in the last two months of the second quarter.
Two of the three major factors that influence pension plans solvency positions were favourable in the most recent quarter. The first was interest rates which, while remaining close to record low levels, reversed their consistent decline of the past few years.
The second favourable factor was contributions since plan sponsors contributed towards their deficits to meet minimum solvency funding requirements.
The third factor was the performance of equity markets which was mixed for the second quarter. United States equities performed best with a 6.7 per cent gain for the quarter, followed by international equities (2.1 per cent), Canadian equities (-5.1 per cent) and emerging market equities (-7.2 per cent).
"Normally, lackluster market performance means bad news for pension plans but, in the latest quarter, the increase in interest rates helped improve the situation for plan sponsors," said Ian Struthers, partner at Aon Hewitt Canada’s investment consulting practice.
The combination of these factors led to a rise in the median solvency funded ratio from 74 per cent at March 31, 2013, to 77 per cent at the end of June. About 95 per cent of pension plans in that sample had a solvency deficiency at the end of the second quarter.
