DB pension plan funding recovers in Q2 after rough Q1: reports
In the second quarter of 2020, the funded positions of defined benefit plans recovered almost half of the losses incurred during the coronavirus crash of the first quarter, according to Mercer’s pension health index.
The index, which represents the solvency ratio of a hypothetical DB pension plan, increased to 101 per cent at the end of June, from 93 per cent at the end of March. While back to full funding, the index is still significantly lower than its level of 112 per cent at the end of 2019.
“While the last few months have been painful, most defined benefit plans have emerged from the depths of the crisis in reasonably strong shape,” said Manuel Monteiro, partner and leader of Mercer Canada’s financial strategy group, in a press release. “Measured across the backdrop of the 20-plus years since Jan. 1, 2000, funded positions have been higher than they are today less than 30 per cent of the time.”
Read: Canadian DB plan solvency drops off coronavirus scare: reports
On a similarly positive note, Aon reported that its median solvency ratio rose to 95.4 per cent, up from 89.1 per cent at the end of the first quarter, according to its median solvency ratio survey.
In the second quarter, median asset returns were 11.5 per cent, compared to negative nine per cent in the first quarter. On the other hand, declining bond yields increased pension liabilities by 2.2 per cent.
“Equity markets have experienced a spectacular and unexpected recovery in Q2 despite the biggest economic downturn in recent history,” said Erwan Pirou, chief investment officer for Canada at Aon, in a press release. “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.”
Pension plans with long time horizons have a hard road ahead, said Mercer, noting low bond yields are forcing pension plans to stay invested in growth assets to stay affordable, but these assets make them vulnerable to market volatility.
The consultancy is encouraging closed and frozen pension plans that remain well-funded to consider taking risk off the table by increasing allocations to defensive assets, diversifying away from equities and considering annuity transactions or merging into jointly-sponsored pension plans that are open to private-sector employers.
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Aon also highlighted the importance of risk management. “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, practice director for retirement solutions in Canada at Aon. “We have almost come full circle from Jan. 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.”