How rebalancing portfolios has boosted Canadian pension plans

Aon research shows a bounceback for plans in the second quarter following earlier losses

How rebalancing portfolios has boosted Canadian pension plans
Steve Randall

Canada’s defined benefit pension plans saw growth in the second quarter of 2020 thanks to making the right choices ahead of a market rebound.

Aon says that the market rebound from March 31 following the collapse earlier in the month as the coronavirus pandemic took hold, led to a 6.3% increase in the solvency positions of plans. Aon's Median Solvency Ratio rose to 95.4%, up from 89.1% at the end of Q1.

Pension plans acted to rebalance their portfolios amid market turbulence and the results speak for themselves with the solvency ratio returning to almost pre-market-slump levels.

"Equity markets have experienced a spectacular and unexpected recovery in Q2 despite the biggest economic downturn in recent history," said Erwan Pirou, Canada Chief Investment Officer, Aon. "Rebalancing portfolios at the end of March proved to be a good strategy and we would continue to recommend this strategy to crystalize the equity market gains."

Pirou added that plans will need an “opportunistic” approach to capturing some of the potential from public markets.

"We continue to see opportunities in private and less liquid markets, while long bond yields are at an all-time record low on the back of central banks intervention. Many clients may want to review how much duration they have,” he said.

The stats

  • Canadian 10-year benchmark bond yields fell by 11 bps in Q2, while long bond yields fell 22 bps. Declining yields increased pension liabilities by 2.2%.
  • Median asset returns in Q2 were 11.5%, compared to -9.0% in Q1 2020.
  • All equity indices increased sharply in the quarter: MSCI Emerging Markets (13%), international MSCI EAFE (9.9%), U.S. S&P 500 (15.4%), global MSCI World (14.2%) and the Canadian S&P/TSX composite (17%). All returns are in Canadian dollar terms.
  • Alternative asset class returns diverged: global infrastructure fell 2.7%, while global real estate rose by 5.3%.
  • In fixed income, falling bond yields drove prices higher, though not enough to offset the adverse impact on plan liabilities. The FTSE Canada Long Term Bond Index rose by 11.2%, while the FTSE Canada Universe Index rose 5.9%.

"The first half of 2020 shows perfectly what kind of risk are inherent in pension plans as we saw equity markets and underlying interest rates both impact plans", said William da Silva, Canadian practice director, Retirement Solutions, Aon. "We have almost come full circle from January 1. It's almost like we are getting a 'do-over'. More than ever, it's time to assess risk, evaluate options to manage funded status volatility and act before another event hits your plan."