Fully Funded Status of Canadian DB Plans Keeps Rising in Q2

The funded ratio for Canadian defined benefit pension funds rose during the second quarter and added to their fully funded status, according to consulting firms Mercer and Aon.

The Mercer Pension Health Pulse, which tracks the median solvency ratio of the defined pension funds in its database, climbed to 119% at the end of June, from 116% at the end of March. The firm attributed the increase to the combination of positive asset returns with rising bond yields, which lowered plans’ liabilities.

At the end of Q2, Mercer said 85% of the plans in its pension database were estimated to be in surplus on a solvency basis, up from 83% at the end of Q1. Approximately 8% are estimated to have ratios between 90% and 100%, compared with 9% at the end of the previous quarter, 3% are estimated to have ratios between 80% and 90%, compared with 4% at the end of the previous quarter, and 4% are estimated to have solvency ratios below 80%, which is unchanged from the end of the first quarter.

“DB pension plans’ funded positions continue to benefit from higher interest rates, with many plans now in surplus positions,” Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary, Alberta, said in a release. “The question that should now be on plan sponsors’ minds is how best to manage this surplus, and potentially locking it in, in order not to re-experience the dark days of significant pension deficits.”

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According to Mercer, despite favorable market conditions for defined benefit plans, many risks remain, with inflation still well above central banks’ target ranges despite significant rate hikes taken worldwide. The firm reported that it is still unknown if additional rate increases will be required if the Bank of Canada’s data suggest inflation will remain high, or if recently reported declines in inflation will lead to a pause.

Defined benefit plans that are in surplus should be thinking of how best to use the surplus, the Mercer report stated. The firm suggested that plan sponsors should evaluate what impact alternative market conditions will have on their plans’ funded ratio, financial position and business. Mercer added that plan sponsors should be reviewing their risk appetite, risk exposures and governance processes.

“Despite the improved financial positions of most DB plans, DB plans sponsors need to remain vigilant given the level of uncertainty that still exists,” Ukonga said. “Plan sponsors should understand and be comfortable with the risks they are taking and hedge or transfer the risks they do not want to retain.”

Meanwhile, Aon’s pension risk tracker, which calculates the aggregate funded position on an accounting basis for companies in the S&P/TSX Composite Index with defined benefit plans, rose to 102.1% from 101.8% over the last three months.

Aon credited the increase in part to Canada’s long-term government bond yield rising seven basis points during the quarter, combined with credit spreads widening by four bps, which resulted in the interest rates used to value pension liabilities rising to 4.71% from 4.60%.

“The muted asset performance and the small increase in discount rates supported a small increase in funded status over the quarter amidst volatility,” Nathan LaPierre, a wealth solutions partner in Aon, said in release. “Pension plans treaded water at healthy funded positions over the last quarter, giving plan sponsors time to consider de-risking activities and shape better decisions.”

Despite Steep Losses, Canadian DB Plans End Year Fully Funded

Canadian DB Plans Weather Market Volatility, Inflation … So Far

Tags: Aon, Aon Pension Risk Tracker, Canada, Defined benefit (db) pension plans, funded level, funded ration, Mercer, Mercer Pension Health Pulse, Pension Funds, Pension Plans

The U.S. Supreme Court will hear a challenge to the legitimacy of the Securities and Exchange Commission’s administrative law judges, brought by George Jarkesy, a hedge fund manager. The court will likely hear the case during its next session and rule by June 2024.

The case dates back to 2011, when the SEC began investigating Jarkesy for securities fraud. Jarkesy was managing two hedge funds with more than 100 customers and more than $24 million in assets. Patriot28 LLC was the fund’s adviser and was also charged by the SEC.

The SEC alleged Jarkesy and Patriot28 defrauded investors by misrepresenting who the prime broker and auditor were; mispresenting the parameters and safeguards of the hedge fund; and overvaluing the funds’ assets in order to justify higher fees.

Jarkesy asked the district and appeals courts in the District of Columbia to review the case, and both responded that they did not have jurisdiction, because Congress empowers the SEC to choose whether to bring a case to federal courts (established via Article III of the U.S. Constitution) or to adjudicate it within the agency.

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The SEC adjudicated the case and ultimately fined Jarkesy and Patriot28 $300,000 in civil fines and ordered them to repay $685,000 in ill-gotten gains. Jarkesy was also barred “from various securities industry activities: associating with brokers, dealers, and advisers; offering penny stocks; and serving as an officer or director of an advisory board or as an investment adviser,” according to the appeals court’s decision.

Jarkesy appealed to the 5th U.S. Circuit Court of Appeals, based in New Orleans. The appellate court ruled in his favor and found that the SEC’s in-house adjudication system violated the Seventh Amendment guarantee to a jury trial in federal civil matters in which the amount in dispute exceeds $25. The appeals court also found that Congress improperly delegated legislative authority to the SEC by permitting the commission to bring a case before a court or the agency’s own administrative law judges. Lastly, the appeals court ruled that administrative law judges’ protection to not be removed except “for cause” violates Article II of the U.S. Constitution by improperly shielding them from presidential removal.

The appeals court’s decision stated, “Petitioners had the right for a jury to adjudicate the facts underlying any potential fraud liability that justifies penalties” and “Congress unconstitutionally delegated legislative power to the SEC when it gave the SEC the unfettered authority to choose whether to bring enforcement actions in Article III courts or within the agency.”

The SEC then appealed to the Supreme Court, seeking a reversal of the 5th Circuit’s decision.

The case could have profound consequences for the authority and administration of the SEC and other federal agencies, depending on which legal theories the Supreme Court upholds or reverses. In addition to the SEC, at least 20 other federal agencies employ administrative law judges.

Tags: ALJ, SEC