Tracking the funded status of pension plans as at June 30, 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 for valuations effective March 31, 2017 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 June, Canadian universe bonds, Canadian long term bonds, Canadian long-term provincial bonds, alternative investments (CAD), the Canadian equity market as well as global equity markets (CAD) showed negative returns. With a return of -1.2%, the low volatility portfolio (LDI1) outperformed the 60/40 portfolio (-1.6%) and the highly diversified portfolio (HD) (-1.8%). The relative outperformance of the LDI portfolio is explained by a smaller weight in global equities and no exposure to alternative investments. The prescribed CIA annuity purchase rates increased during the month, while the rates used in the calculation of solvency liabilities decreased during the month, increasing 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 decrease.

Evolution of the solvency ratio as at June 30, 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 Canadian long term bonds, global equity markets as well as the alternative investments, the 60/40 portfolio, the LDI portfolio and the HD portfolio returned 4.2%, 5.9% and 4.9% respectively. The solvency liabilities increased over that same period between 3.2% and 3.4% depending on the duration of the group of retirees. The variation in the plan’s solvency ratio as at June 30, 2017 stands between 0.6% and 2.6%.

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 - July 2017 (PDF)