Defined Benefit Pension Plans solvency funding inching upwards in third quarter of 2012
Slight improvement in solvency funded ratio since the last quarter
TORONTO, Oct. 1, 2012 /CNW/ - Strong equity returns were the main reasons for the slight improvement in the financial status of pension plans in the third quarter of 2012, according to Aon Hewitt, the global human resource solutions business of Aon plc (NYSE:AON). The median solvency funded ratio of a large sample of pension plans has increased from 66% at the end of June 2012 to 68% at the end of September 2012.
"Even with this improvement, it still leaves the typical plan in the same position as it was at the start of 2012 - despite the significant cash contributions that have typically been made" said Thomas Ault, an Associate Partner in Aon Hewitt's retirement practice.
The improvement over the quarter is mainly due to positive equity returns: 7.0% for the Canadian stock exchange, 2.7% (in Canadian dollars) for U.S. equities and 3.3% (in Canadian dollars) for international equities. Long term interest rates have remained virtually unchanged over the quarter.
About 97% of pension plans in this sample had a solvency deficiency as at September 30. The solvency funded ratio measures the financial health of a defined benefit pension plan by comparing the amount of assets to total pension liabilities in the event of a plan termination.
We can see that assets have only increased by 17% over the 2.75 year period since January 1, 2010 while liabilities, driven by a continuous drop in long term interest rates, have increased by 48% over the same period.
Impact of de-risking
As well as the typical plan, Aon Hewitt has also tracked the performance of a plan that has employed a few simple de-risking strategies since January 1, 2011 namely:
- Increased investment in bonds from 40 per cent to 60 per cent of the portfolio
- Investment in long bonds instead of universe bonds to better match liabilities.
The de-risked plan would have experienced a 77% solvency ratio as at September 30, 2012 as opposed to 68% for the median plan.
Impact of a rise in interest rates
"For many plan sponsors an increase in interest rates would provide the most effective means of pulling their plan out of the doldrums" says André Choquet, a Senior Associate in Aon Hewitt`s Investment Practice.
For example, a 50 basis points (0.5%) rise in interest rates would improve the solvency position of the median plan by 500 basis points (i.e. from 68% to 73%). It would take an immediate increase in equity markets of about 14% to have the same effect.
"Of course the impact would be the opposite should interest rates decrease by 0.5%" adds Choquet "and plan sponsors need to be aware of this risk as we get close to the end of the year when formal valuations are usually performed."
About Aon Hewitt
Aon Hewitt is the global leader in human resources solutions. The company partners with organizations to solve their most complex benefits, talent and related financial challenges, and improve business performance. Aon Hewitt designs, implements, communicates, and administers a wide range of human capital, retirement, investment management, health care, compensation and talent management strategies. With more than 29,000 professionals in 90 countries, Aon Hewitt makes the world a better place to work for clients and their employees. For more information on Aon Hewitt, please visit www.aonhewitt.com.
Aon plc NYSE:AON is the leading global provider of risk management, insurance and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 61,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative and effective risk and people solutions and through industry-leading global resources and technical expertise. Aon has been named repeatedly as the world's best broker, best insurance intermediary, reinsurance intermediary, captives manager and best employee benefits consulting firm by multiple industry sources. Visit www.aon.com for more information on Aon and www.aon.com/manchesterunited to learn about Aon's global partnership and shirt sponsorship with Manchester United.
Image with caption: "Aon Hewitt Survey of Median Solvency Ratio 2010-2012 (CNW Group/AON Hewitt)". Image available at: http://photos.newswire.ca/images/download/20121001_C3306_PHOTO_EN_18715.jpg
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