Canadian pension plans, thrown for a loop in the COVID-19 market meltdown, got healthier in the second quarter, although they haven’t returned to precrisis levels of funding.
Two consulting firms say their measures of the health of defined benefit (DB) pension plans suggest the typical Canadian plan’s solvency funding – which is the ratio of its assets to the estimated cost of paying the future benefits the plan has promised – returned to levels above 90 per cent on June 30. Canadian plans dropped from an average of 100 per cent funded on Dec. 31 to a range between 80 per cent and 90 per cent in the depths of the stock market collapse in mid-March.
Consulting firm Mercer Canada Ltd. said its pension health index, which represents solvency funding at a hypothetical Canadian DB plan, closed June 30 at 101 per cent, up from 93 per cent at the end of March, but still below 112 per cent at the end of 2019.
Manuel Monteiro, leader of Mercer Canada’s Financial Strategy Group, cautioned the index might be a bit optimistic – he says the median solvency ratio of DB plans of his company’s clients was 91 per cent on June 30, up from 84 per cent on March 31.
Aon PLC said its measure of DB pension solvency in Canada, which approached record highs in the fourth quarter of 2019, hit 95.4 per cent on June 30, up from 89.1 per cent on March 31, but still below 102.5 per cent on Jan. 2.
Pension plans were hit by a double-whammy in the early days of the COVID-19 market crisis. Stocks plummeted by more than a third, damaging the value of plan assets. And interest rates on government bonds fell, which, according to pension math, made the the current value of DB plans’ future liabilities bigger. During the volatile action in markets in March, the two firms’ measures of pension health sometimes swung multiple percentage points in a single day.
The Financial Services Regulatory Authority of Ontario (FSRA) estimated the median solvency funding of DB plans fell from 99 per cent at the end of 2019 to just 85 per cent at March 31. Ontario pension funding rules require DB plans to have a solvency ratio of at least 85 per cent, or else employers have to make extra payments to push their pensions back to that level. Plans only need file their funding levels once every three years, however, meaning many plans will likely file the healthy numbers they had as of last Dec. 31.
Since March 31, stock markets have rebounded, adding back to plan assets. But interest rates remain low, and in both pension consultants’ solvency measures, the impact of low rates in the second quarter blunted equities’ gains.
The big question for plans now is what’s next.
“The thing that I’m concerned about is the improvement has really been driven by equity markets, which have bounced back almost to where they were at the beginning of the year,” Mr. Monteiro said.
“And the real economy – we’re not seeing that. Companies aren’t back to where they were at the beginning of the year. So it just feels to me that the equity markets are really being very optimistic right now, assuming everything is going to bounce back to normal. ... Anything that would spoil that picture is going to be bad news for pension plans.”
Will da Silva, national retirement director of Aon, says he’s telling clients that markets seem to be “on the other side of the mountain” of the March crisis, but plan sponsors need to look at their mix of stocks and bonds, and consider what will happen if stocks plunge again.
“We’re not suggesting people should go rebalance every second day, but most well-run plans do have a rebalancing strategy. It’s kind of an old-school thought, but you sell when it’s high and you buy when it’s low. Rebalancing executes some of that.”
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