Solvency ratio of Canadian defined benefit pension plans falls to 90.6% in 2014

TORONTO – A decrease in long-term interest rates has left Canadian defined benefit pension plans worse off this year, consulting firm Aon Hewitt says.

The company, citing a survey of 449 plans it administers in the public, semi-public and private sectors, said Wednesday the drop in rates more than offset investment returns.

According to the survey, the median solvency funded ratio, or the market value of plan assets over liabilities, stood at 90.6 per cent as of Dec. 31.

That represented a decline of 0.5 percentage points from the previous quarter ended Sept. 30, and a 2.7 percentage point drop from plan solvency at Dec 31, 2013, the first annual decrease since 2011.

Long-term interest rates, which are used to calculate pension plan liabilites, fell nearly one full percentage point in 2014, increasing the amount plans needed to hold.

Meanwhile, the survey also showed the number of plans that were more than fully funded declined to 18.5 per cent as of Dec. 31, down from 23 per cent the previous quarter and 26 per cent at the end of 2013.

“If nothing else, the performance of Canadian DB plans in 2014 shows how quickly the solvency landscape can change in response to capital market volatility,” said William da Silva, a senior partner at Aon Hewitt.

“Plans that stayed exposed to interest rates really took a beating in 2014,” said da Silva. “Those plan sponsors who have implemented or fine-tuned their risk management strategies performed much better than traditional plans amid interest rate declines.”

Da Silva said it would be “even more crucial” in 2015 for plan sponsors to re-evaluate their approach to risk management, noting that the pending introduction of new mortality tables for the Canadian market “may have a significant adverse impact on plan solvency.”

Canadians are living longer and, according to Aon Hewitt, that means changes from by the Canadian Institute of Actuaries could result in a decline in median plan solvency of more than four percentage points.