Tracking the funded status of pension plans as at February 28, 2017

This graph shows the changes in the financial position of a typical defined benefit plan with an average duration since December 31, 2016. For this illustration, assets and liabilities of the plan were each arbitrarily set at $100 million as at December 31, 2016. The estimate of the solvency liabilities reflects the new CIA guidance published in March 2017 for valuations effective December 31, 2016 or later. The following graph shows the impact of three typical portfolios on plan assets and the effect of interest rate changes on solvency liabilities of medium duration.

The evolution of the financial situation of pension plans since December 31, 2016

The evolution of the financial situation of pension plans since December 31, 2016

During the month of February, Canadian universe bonds, Canadian long term bonds, Canadian long-term provincial bonds, alternative investments as well as Canadian and global equity markets (CA $) showed positive returns. With a return of 2.3%, the highly diversified portfolio (HD) and the low volatility portfolio (LDI1) outperformed the 60/40 portfolio (1.9%). The outperformance of the HD and LDI portfolios in comparison to the 60/40 portfolio is explained by the allocation in alternative assets and Canadian long-term provincial bonds. The prescribed CIA rates used in the calculation of solvency liabilities increased during the month, decreasing the solvency liabilities by 1.3% for a medium duration plan. For this type of plan, an investment in either of the 60/40, the LDI or the HD portfolio resulted in a solvency ratio increase.

Evolution of the solvency ratio as at February 28, 2017 for three different portfoliosportfolio

The table shows the impact of past returns on plan assets and the effect of interest rate changes on solvency liabilities of a medium duration plan, based on the plan’s initial solvency ratio as at December 31, 2016 as well as the asset allocation of the three typical portfolios. Since the beginning of the year, driven by strong returns in the global equity markets, the 60/40 portfolio, the LDI portfolio and the HD portfolio returned 1.9%, 1.6% and 2.1% respectively. The solvency liabilities decreased over that same period between 3.2% and 3.3% depending on the duration of the group of retirees. The variation in the plan’s solvency ratio as at February 28, 2017 stands between 3.0% and 5.6%.

Please contact your Morneau Shepell consultant for a customized analysis of your pension plan.

Comments

  1. No consideration has been made for contributions paid to the plan or for benefits paid out of the plan.
  2. Solvency liabilities are projected using the rates prescribed by the Canadian Institute of Actuaries (CIA) for the purpose of determining pension commuted values.
  3. The underlying typical defined benefit plan is a final average plan with no pension indexing, including active and inactive participants representing 60% and 40% of liabilities, respectively.
  4. Assets are shown at full market value. Returns on assets are based on three typical benchmark portfolios.

1  Liability driven investment


News & Views - March 2017 (PDF)