Aon: It could be worst quarter for DB pension plans "possibly ever"

Solvency positions of Canadian plans have fallen to the lowest level in more than three years amid volatility in the financial markets

Aon: It could be worst quarter for DB pension plans "possibly ever"
Steve Randall

The health of Canada’s defined benefit pension plans weakened in the first quarter of 2020 as the coronavirus pandemic hit financial markets.

A new Median Solvency Ratio Survey from Aon plc shows that the solvency position of Canadian DB pension plans decreased 13 percentage points quarter-over-quarter (to 89.1% from 102.5%).

That means that the financial health of the plans has fallen to the lowest level since November 2016.

Solvency fell by 6.7 percentage points in March alone – median solvency stood at 95.8% at the end of February – but rebounded from 85.7% after March 12.

Pension plans were pressured by market volatility with all equity indices down sharply in the quarter (figures in Canadian dollar terms):

  • MSCI Emerging Markets (-16.1%)
  • International MSCI EAFE (-15.3%)
  • US S&P 500 (-11.8%)
  • Global MSCI World (-13.3%)
  • Canadian S&P/TSX composite (-20.9%)

"March might have been the cruelest month for equities, but we are not confident the volatility has ended," said Erwan Pirou, Canada chief investment officer at Aon. "In this environment, it makes sense for pension plan sponsors to consider rebalancing their portfolios to move back to their targets, although constrained liquidity conditions mean they should be very cautious in making trades. Sponsors should also remain ready to take advantage of opportunities, which may be arising as market dislocations and tight liquidity conditions create mispricings – which is already the case in credit markets, for example.”

Bonds, alternatives impact
Of course, it’s not just equities that have affected returns for pension plans.

In fixed income, falling bond yields drove prices higher in the first quarter, though not enough to offset the adverse impact on plan liabilities. The FTSE Canada Long Term Bond Index rose by 0.2%, while the FTSE Canada Universe Index rose 1.6%.

“In the short term at least, we expect suppressed bond yields and volatility to continue, meaning pension plans must continually re-evaluate their risk mitigation strategies," added Pirou.

Alternative asset classes also declined: global infrastructure fell by 22.4%, while global real estate fell by 21.6%.

Worst in a decade…or ever
While things are challenging for pension plans, overreacting isn’t the right strategy according to William da Silva, Aon’s Canadian practice director, Retirement Consulting. 

"The first quarter of 2020 is shaping up to be the worst for the Canadian pension plans in more than a decade – perhaps ever," he said.

But he added that plans should review their risk strategies, update cash-flow projections, and keep calm. 

“There might also be opportunities in the pension risk transfer market for plans that have been waiting to transact, given bond volatility,” he said. “In general, though, we believe it is a best practice for pension plans to stay true to their risk management strategies. Now is the time to react in a measured fashion – not overreact to market conditions that are still in a state of flux."