Skip to main content

Globe Investor Strong global markets boost Canadian pension solvency

A man is reflected on an electronic monitor displaying share prices outside a brokerage in Tokyo, July 9, 2012.

ISSEI KATO/REUTERS

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.

Story continues below advertisement

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.

Story continues below advertisement

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."

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter