TORONTO, Oct. 1, 2013 /CNW/ - Canadian defined benefit (DB) pension
plans saw a marked improvement in solvency funding in the third quarter
of 2013, according to the latest survey by Aon Hewitt, the global human
resource solutions business of Aon plc (NYSE: AON).
The survey of more than 275 Aon Hewitt administered pension plans from
the public, semi-public and private sectors, indicates that the median
pension solvency funded ratio, or the ratio of the market value of plan
assets to liabilities, increased to 88% by September 30, 2013. That is
11 percentage points higher than at the end of June and 19 percentage
points higher than it was at year-end of 2012. 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.
"The significant improvement of solvency ratios in Canadian plans means
that the average Canadian DB plan has erased more than 50% of its
solvency deficit since the beginning of the year. For the strategic
plan sponsor, this result in a significant reduction in their minimum
required contributions in 2014 and beyond," said Will da Silva, Senior
Partner, Retirement Practice, Aon Hewitt. "The potential reduction in
contributions gives sponsors greatly increased financial flexibility as
it not only reduces the level of required contributions, but it could
also provide some plan sponsors with cost certainty over the coming
The improvement in the solvency ratio resulted mainly from stronger
equity market returns and higher long-term interest rates, which rose
by 0.4% in the quarter. Further improvement can be attributed to
sponsor contributions to the plans to meet minimum solvency funding
The performance of equity markets was relatively strong in the third
quarter. Worldwide, equities gained 6.4%, led by non-North American
(10.0%), Emerging Market equities (4.6%), U.S. Equities (3.4%) and
Canadian Equities (6.7%). Alternative asset classes such as
Infrastructure and Global Real Estate improved their returns over the
previous quarter, with 4.9% and 0.9% respectively.
"Improved market conditions, interest rates, and contributions meant
that all three of the major factors that influence plan solvency were
aligned favourably for plan sponsors in the third quarter," said Ian
Struthers, Partner, Investment Consulting Practice, Aon Hewitt Canada.
"Plan sponsors who were strategic in managing their assets within a
risk-based framework really benefited. The result was the best solvency
ratio in almost three years, creating an opportunity for sponsors to
initiate or build on de-risking or funding strategies. Now is the time
for them to take action."
The graph shows the changes to assets, liabilities and funded ratios for
the survey's median pension plan since January 1, 2010 (see link at
bottom of release).
"Aon Hewitt's median is an accurate representation of the financial
health of the Canadian pension plan universe," Struthers said. "It
takes into account the specific features of each of the plans included
in our large database as it based on real data, and capture the effect
of each individual plan's investment policy, actual contributions, and
any solvency relief measures adopted by the plan sponsor."
Approximately 85% of the surveyed plans had a solvency deficiency at the
end of the third quarter, compared with 95% in the previous quarter.
"While it was generally a favourable quarter for the average Canadian DB
plan, there were headwinds for some plans that provide benefits indexed
to inflation to retirement. With the recently released guidance from
the Canadian Institute of Actuaries, the improvement in the solvency
ratio for some plans may not have been as significant, depending on the
province where they are registered," said da Silva.
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 percent to 60 percent of the
Investment in long bonds instead of shorter duration bonds to better
The de-risked plan would have experienced a 92% solvency ratio at the
end of September 2013 as opposed to 88% for the median plan.
About Aon Hewitt's Median Solvency Ratio
Aon Hewitt's Median Solvency Ratio is developed using a database of more
than 275 pension plans from all sectors (public, semi-public and
private) and from most Canadian provinces. Each plan's characteristics
and data are used to project their solvency ratio on a monthly basis.
These projections take into account the increase in financial indices
for various asset classes, as well as the applicable interest rates to
value liabilities on a solvency basis.
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About Aon Hewitt
Aon Hewitt empowers organizations and individuals to secure a better
future through innovative talent, retirement and health solutions. We
advise, design and execute a wide range of solutions that enable
clients to cultivate talent to drive organizational and personal
performance and growth, navigate retirement risk while providing new
levels of financial security, and redefine health solutions for greater
choice, affordability and wellness. Aon Hewitt is the global leader in
human resource solutions, with over 30,000 professionals
in 90 countries serving more than 20,000 clients worldwide. 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 65,000 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.
PDF available at: http://stream1.newswire.ca/media/2013/10/01/20131001_C6225_DOC_EN_31571.pdf
SOURCE: AON Hewitt
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