Defined benefit pension plans solvency improves significantly

Third quarter showed marked funding improvement, best solvency ratio in three years
||Last Updated: 10/02/2013

Defined benefit (DB) pension plans showed significant improvement during the third quarter of 2013, a new survey found.

A survey of more than 275 Aon Hewitt administered pension plans from the public and private sectors showed the median pension solvency funded ratio (the ratio of the market value of plan assets to liabilities) increase to 88 per cent by Sept. 30.

That marks an increase of 11 percentage points since the end of June and 19 percentage points since 2012 year-end.

The solvency funded ratio measures the financial health of a DB pension plan by comparing assets to liabilities in the event of a plan termination.

"The significant improvement of solvency ratios in Canadian plans means that the average Canadian DB plan has erased more than 50 per cent of its solvency deficit since the beginning of the year. For the strategic plan sponsor, this (results) in a significant reduction in their minimum required contributions in 2014 and beyond," said Will da Silva, senior partner of retirement practice at Aon Hewitt.

"The potential reduction in contributions gives sponsors greatly increased financial flexibility as it not only reduces the level of required contributions, but it could also provide some plan sponsors with cost certainty over the coming years."

The improvements to the solvency ratio are mainly due to stronger equity market returns and higher long-term interest rates. Sponsor contributions to the plans to meet minimum solvency funding requirements were also a source of improvement.

"Improved market conditions, interest rates, and contributions meant that all three of the major factors that influence plan solvency were aligned favourably for plan sponsors in the third quarter," said Ian Struthers, partner, investment consulting practice at Aon Hewitt Canada.

"Plan sponsors who were strategic in managing their assets within a risk-based framework really benefited. The result was the best solvency ratio in almost three years, creating an opportunity for sponsors to initiate or build on de-risking or funding strategies. Now is the time for them to take action."

About 85 per cent of the surveyed plans had a solvency deficiency at the end of the third quarter, compared to 95 per cent in the previous quarter.

"While it was generally a favourable quarter for the average Canadian DB plan, there were headwinds for some plans that provide benefits indexed to inflation to retirement. With the recently released guidance from the Canadian Institute of Actuaries, the improvement in the solvency ratio for some plans may not have been as significant, depending on the province where they are registered," said da Silva.

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