Canadian Defined Benefit Pension Plans Solvency Increased 3% in the Second Quarter, Despite Market Decline: Aon Hewitt

TORONTO, July 2, 2013 /CNW/ - Defined benefit (DB) pension plan sponsors in Canada saw a marked improvement in their solvency funding in the second quarter of 2013, despite bond and equity markets falling, according to the latest survey by Aon Hewitt, the global human resource solutions business of Aon plc (NYSE: AON).

The Aon Hewitt survey indicates the median pension solvency funded ratio, or the ratio of the market value of plan assets to liabilities, was approximately 3 percentage points higher at the end of June than at the end of March 2013. This improvement is mainly the result of the 70 basis point rise in interest rates seen in the last two months of the second quarter.

Two of the three major factors that influence pension plans solvency positions were favourable in the most recent quarter. The first was interest rates which, while remaining close to record low levels, reversed their consistent decline of the past few years. While bond sell-off has resulted in falling bond prices, which is a negative for pension plan assets, it also reduced the value of pension plan liabilities. Since the size of the liabilities is greater than the typical plan's bond portfolio, and the duration is longer, the decline in liabilities far outweighs any poor bond returns. The result is improvement in solvency funding.

The second favourable factor was contributions since plan sponsors contributed towards their deficits to meet minimum solvency funding requirements.

The third factor was the performance of equity markets which was mixed for the second quarter. US Equities performed best with a 6.7% gain for the quarter, followed by International Equities (2.1%), Canadian Equities (-5.1%) and Emerging Market Equities (-7.2%). Pension plans with investments in alternative asset classes such as Infrastructure and Global Real Estate had recently been rewarded but, over the last quarter, the results were more modest at 2.8% and -1.1% respectively for these two asset classes.

"Normally, lackluster market performance means bad news for pension plans but, in the latest quarter, the increase in interest rates helped improve the situation for plan sponsors," said Ian Struthers, Partner, Investment Consulting Practice, Aon Hewitt Canada.

The combination of these factors led to a rise in the Aon Hewitt survey's median solvency funded ratio of a large sample of pension plans from 74% at March 31, 2013 to 77% at the end of June. About 95% of pension plans in that sample had a solvency deficiency at the end of the second quarter. 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 following graph depicts the movement of assets, liabilities and funded ratios for the survey's median pension plan since January 1, 2010.

"The solvency gap grew since December 31, 2009 because asset values only increased 28%, while liabilities have increased by 42%, driven by the drop in long-term interest rates. The recent reversal in long-term rates has had a big impact," said Struthers.

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 portfolio 
  • Investment in long bonds instead of shorter duration bonds to better match liabilities.

The de-risked plan would have experienced an 85% solvency ratio at the end of June 2013 as opposed to 77% 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.

"The main advantage of Aon Hewitt's median is that it takes into account the specific features of each of the plans included in our large database," Struthers said. "It is important to ensure the survey graph is based on real data, and that it captures the effect of each individual plan's investment policy, minimum contributions required, and the effect of any relief measures adopted by the plan sponsor. Aon Hewitt's median therefore truly reflects the Canadian pension plan universe."

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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

About Aon
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 for more information on Aon and to learn about Aon's global partnership and shirt sponsorship with Manchester United.

Image with caption: "Aon Hewitt Survey of Median Solvency Ratio 2010-2013 (CNW Group/AON Hewitt)". Image available at:


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