The funded levels of Ontario’s defined benefit pension funds lost 2% in the third quarter, the first decline in seven quarters, according to the province’s financial services regulator’s most recent Solvency Report.
“While the overall funded position of plans remains strong at 121%, this pause serves as a reminder to plan sponsors and administrators to remain vigilant, be future-focused, and strategic in managing plan risks as market conditions evolve,” the FSRA report stated.
Despite the decline, all asset classes registered positive gains for the funds during the quarter, with an average net return of 6.3%. However, the gains were offset by an increase in plan liabilities due to a drop in solvency discount rates.
As of the end of September, the median projected solvency ratio for the funds was 121%, compared with 123% as of June 30. According to the FSRA, 90% of Ontario’s pension plans were projected to be fully funded on a solvency basis, while 8% had a solvency ratio between 85% and 100%, and only 2% had a solvency ratio lower than 85%. All three figures were unchanged from the previous quarter.
“With inflation trending downward, potential interest rate declines could negatively impact funding levels,” FSRA Chief Actuary Lester Wong said in a statement. “This serves as an important reminder for plan sponsors and administrators to stay alert, future-focused, and strategic in managing risks as market conditions evolve.”
According to the FSRA, it encourages pension plans to use stress tests, modeling and other analytical tools to manage risks and assess investment strategies.
“This is the reality that faces pension plans, and it is why FSRA continues to emphasize the need for plan sponsors and administrators to actively manage evolving risks,” the FSRA report stated. “While the recent drop in long-term interest rates has driven up liabilities, it has been offset by solid investment returns.”
However, the FSRA added that, with inflation trending lower, future interest rate cuts could negatively affect funding levels.
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Tags: Defined Benefit, financial services regulator, FSRA, funded level, Interest Rates, Lester Wong, Ontario, Pension, solvency