TORONTO, Jan. 2, 2014 /CNW/ - Canadian defined benefit (DB) pension plans' solvency continued to improve significantly in the fourth quarter of 2013 and ended the year in a much stronger position than at the same point in 2012, according to the latest survey by Aon Hewitt, the global human resource solutions business of Aon plc (NYSE:AON).
The latest quarterly survey of more than 275 Aon Hewitt administered pension plans from the public, semi-public and private sectors found that the median solvency funded ratio, or the ratio of the market value of plan assets to liabilities, increased to 93.4% by December 31, 2013. That is a 5.7 percentage point improvement from the end of October 2013 and 24.8 points higher than it was a year ago.
"Last year saw a remarkable turnaround and we ended with the highest median solvency ratio in six years and more than 28 percentage points higher than it was in mid-2012," said Will da Silva, Senior Partner, Retirement Practice, Aon Hewitt. "During the year, the Canadian Institute of Actuaries issued guidance affecting some plans that offer benefits indexed to inflation to retirement. Depending on the province where the plan is registered, some indexed plans may not have seen as much of the improvement in the solvency ratio as the median plan," da Silva said.
"This tremendous improvement in the financial health of pension plans should trigger plan sponsors to revisit their funding and investment strategies as they may be closer to their ultimate de-risking objectives. Many sponsors will start considering such end-game options as:
- full immunization of plan assets to plan liabilities,
- partial settlement of retiree liabilities or
- full plan wind-up."
"At the very least, sponsors should be analyzing the plan's risk profiles to ensure that they truly understand how the change in capital markets in the last 12 months affected their plans and put strategies in place to limit their exposure should capital markets become unfavourable to the plan again," da Silva said.
Approximately 26% of the surveyed plans were more than fully funded at the end of the fourth quarter, compared with 15% in the previous quarter and 3% at the 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. Aon Hewitt's median pension solvency ratio represents the financial condition of Canadian DB pension plans by drawing on a large database and reflecting each plan's specific features, investment policy, contributions and solvency relief steps taken by the sponsor.
The major contributors to increased solvency were improved equity market returns, with help from higher long-term interest rates, which rose by 91 basis points over the year, and sponsor contributions toward solvency funding requirements. Interest rates on long-term bonds remained low, compared to earlier years, but the benchmark Government of Canada yield increased from 2.37% to 3.28% during 2013.
Equity markets were relatively strong in 2013. Worldwide, equities gained 35.5% with the strongest performance coming from the United States with a 41.6% return for the year. That was followed by non-North American international equities at 31.3% and Canadian equities at 12.7%. Emerging Market equities produced a return of 4.1%.
Alternative asset classes provided positive returns over the year with global Infrastructure and utilities generating 25.9% and global real restate returning 11.4%.
"Over the year, we saw improvement in the three key factors affecting plan solvency. With higher interest rates, stronger market returns, and increased contributions, the median plan was in a far better position at the end of 2013," said Ian Struthers, Partner, Investment Consulting Practice, Aon Hewitt. "With this new position, investment strategies may need to be adjusted to recognize plans' new reality."
"Aon Hewitt's median accurately reflects the Canadian pension plan universe. It takes into account the specific features of each of the plans included in our large database," Struthers added. "Given the complex environment in which these plans operate, our survey graph which is based on real data captures the effect of each plan's investment policy, minimum contributions required, and any relief measures adopted by the plan sponsor as well as the changes in market returns."
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.
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.
Image with caption: "Median Solvency Ratio (CNW Group/AON Hewitt)". Image available at: http://photos.newswire.ca/images/download/20140102_C6987_PHOTO_EN_35299.jpg
Image with caption: "Plan solvency ratio distribution (as at December 31) (CNW Group/AON Hewitt)". Image available at: http://photos.newswire.ca/images/download/20140102_C6987_PHOTO_EN_35300.jpg
Image with caption: "Reconciliation of changes in the solvency ratio in 2013 (CNW Group/AON Hewitt)". Image available at: http://photos.newswire.ca/images/download/20140102_C6987_PHOTO_EN_35301.jpg
SOURCE: AON Hewitt
For further information:
Alexandre Daudelin │ +1.514.982.4910 │ [email protected]