Canadian pension plans got a much-needed boost to their solvency position in the third quarter this year thanks to stronger stock markets around the globe.
Pension consulting firm Mercer said its Pension Health Index – which measures the funding health of a model pension plan – climbed to 80 per cent at Sept. 30 from 77 per cent at June 30. The model estimates the funding position of a typical plan, assuming a traditional asset mix and basic required cash contributions by employers to fund deficits.
The findings are in line with results reported earlier this week by Aon Hewitt, which found the solvency ratio of a sampling of pension plans increased by two percentage points to 68 per cent at the end of September from 66 per cent at the end of June. Aon Hewitt said the funding position of a typical pension plan is back where it was at the start of 2012, essentially regaining ground lost in the second quarter.
While the Aon and Mercer reports point to different overall funding levels for typical Canadian pension plans, they both indicate similar trends in funding improvement, and both show that pension plans still have large funding deficits despite a modest improvement in the past quarter.
Aon Hewitt said about 97 per cent of pension funds it tracks still had a solvency deficit as of Sept. 30, which means their asset portfolios were less than their estimated future total liability for providing pensions to its members. Continuing low interest rates have been the biggest problem for many plans.
“For many plan sponsors an increase in interest rates would provide the most effective means of pulling their plan out of the doldrums,” said Aon senior associate André Choquet.
Even a 0.5 per cent increase in interest rates would improve the solvency position of the median pension plan by five percentage points to 73 per cent from 68 per cent currently, he said in a release.
Mercer said a typical pension portfolio has earned 5.8 per cent on its investments so far this year, due almost entirely to better stock market returns.
Mercer partner Manuel Monteiro said stronger returns on equity investments accounted for two percentage points of the funding increase seen by pension plans in the third quarter, while cash contributions by employers to improve funding accounted for a third percentage point of funding improvement.
Unlike the second quarter, pension plans saw the other side of their balance sheets – their liability for pension benefits – remain virtually unchanged in the third quarter, he said.
In a release Tuesday, Mr. Monteiro said many pension plans are responding to the volatility of their pension obligations to make investment changes that “derisk” their holdings so the returns are less volatile quarter to quarter.
“To many plan sponsors, the pension plan feels like a tightening noose,” he said. “With seemingly insurmountable problems, some have been tempted to stick with the status quo in the hope of better times. Some, however, are beginning to see the merit in a long-term strategy to gradually loosen the noose.”