The poor equity market performance, the continued decline in long-term bond yields and new mortality tables that reflect increased life expectancy, have all combined to cause a slight decline in the funded status of the country’s pension plans in 2015. The only good news: the funded status of the 611 plans covered in the Mercer study was improved by the positive impact of the decline in the Canadian dollar on foreign asset returns.
That’s the two key conclusions contained in a report by Mercer, a pension consulting company that was released Tuesday. At the end of 2015, Mercer said that the “median solvency ratio of the pension plans” of its clients stood at 85 per cent, down from 88 per cent one year earlier.
A similar result applied when an alternative measure, The Mercer Pension Health Index, which represents the solvency ratio of a hypothetical plan, was used. That measure finished the year at 93 per cent down from 95 per cent at the end of 2014. In parts of 2014 and 2015 the same measure – that shows the ratio of assets to liabilities for a model pension plan – posted a solvency ratio of more than 100 per cent.
According to its analysis, a typical balanced pension portfolio would have returned 2.9 per cent during the fourth quarter and 5.3 per cent for 2015.
“There was considerable variability in the financial performance of pension plans in 2015,” said Manuel Monteiro, leader of Mercer’s Financial Strategy Group. “Pension plans with significant Canadian equity holdings and those that hedge their foreign currency exposure experienced larger than average declines in their solvency ratio.”
In its report, Mercer said that with “weak economic conditions continuing to persist and central bankers discussing the possibility of negative interest rates, plan sponsors are coming to the conclusion that they cannot count on higher interest rates to erase their lingering pension deficits.”
Mercer noted one possible solution: pension plans need to better understand the risks that they face, and establish a robust risk management strategy to manage them.
The report noted that at least four provincial governments have recognized the challenging economic conditions and are moving towards lessening the funding burden for defined benefit pension plan sponsors. Mercer said that Quebec is making the most significant changes “by moving away from a solvency-based funding target starting in 2016,” while Alberta and British Columbia have also introduced helpful changes in the past few years.
As for Ontario, Mercer said that it has recently announced plans to develop a set of reforms that would “focus on plan sustainability, affordability and benefit security while balancing the interests of pension stakeholders.”