(January 3, 2014) — Canadian defined benefit pension plans averaged a funding ratio of 93.4% at the end of last year, marking an increase of 24.8 percentage points over the past 12 months.
Approximately 26% of the surveyed plans were more than fully funded at the end of the fourth quarter, compared with 15% in the previous quarter and 3% at the end of 2012.
Will da Silva, senior partner at Aon Hewitt, said the tremendous improvement in the financial health of pension plans should trigger plan sponsors to revisit their funding and investment strategies as they may be closer to their ultimate de-risking objectives than they previously thought.
“Many sponsors will start considering such end-game options as full immunisation of plan assets to plan liabilities, partial settlement of retiree liabilities, or a full plan wind-up,” he continued.
“At the very least, sponsors should be analysing the plan’s risk profiles to ensure they truly understand how the change in capital markets in the last 12 months affected their plans, and put strategies in place to limit their exposure should capital markets become unfavourable to the plan again.”
The main causes of this increased solvency position were the improved equity market returns, higher long-term interest rates—which rose by 91 basis points over the year—and sponsor contributions toward solvency funding requirements.
The data was echoed by rival consultants Mercer, which has also released its latest round of research on Canadian funds at the turn of 2014.
Its pension “health” index reached its highest level in 12 years at the end of December. The index, which tracks the funded status of a hypothetical defined benefit pension plan, stood at 106% on December 31, up from 82% at the start of the year and at its highest level since June 2001.
Almost 40% of pension plans tracked by Mercer are now fully funded, compared to 6% at the beginning of last year. In addition, just 6% are now less than 80% funded, down sharply from 60% at the beginning of the year.
But Canadian plan sponsors must do more to tackle the risk profiles of their portfolios before they crack open the champagne. In November, Aon Hewitt warned that too many Canadian plan sponsors still had a long way to go in terms of de-risking their pension plans.
Research from November 2013 found only 33% of Canadian plans reduced their equity holdings in the past year, with another 30% planning to continue the trend to divest from equities in the year ahead, causing alarm bells to ring for da Silva.
“Successful plan management can no longer be considered a passive exercise,” he said at the time. “It requires careful attention to long-term funding and investment strategy and a disciplined focus on adapting the strategy to take advantage of opportunities that may arise.”
So severe are the concerns around pension funds’ solvency in Canada that 46% of funds took advantage of funding relief measures offered by the government—which allow for the elimination of debt payments relating to solvency deficiencies, extension of the solvency debt payment period up to a maximum of 10 years, and the use of a smoothed asset value for solvency valuations. Another 30% planned to use the relief in 2014 too.
Related Content: The Truth About Canadian Pensions and CPPIB’s Wiseman on Mistakes, Hockey, and the Birth of the Canadian Model