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Tracking the funded status of pension plans as at August 31, 2018

This graph shows the changes in the financial position of a typical defined benefit plan with an average duration since December 31, 2017. For this illustration, assets and liabilities of the plan were each arbitrarily set at $100 million as at December 31, 2017. The estimate of the solvency liabilities reflects the new CIA guidance for valuations effective June 30, 2018 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, 2017

The evolution of the financial situation of pension plans since December 31, 2017

During the month of August, global equity markets (CAD), Canadian universe bonds, Canadian long-term bonds as well as Canadian long-term provincial bonds showed positives returns while the Canadian equity markets and alternative investments showed negatives returns. With a return of 0.8%, the low volatility portfolio (LDI1) outperformed the highly diversified portfolio (HD) (0.5%) and the 60/40 portfolio (0.4%).

The relative outperformance of the LDI portfolio is mainly due to a bigger allocation in Canadian long-term provincial bonds. The prescribed CIA Annuity purchase rates decreased while the commuted value rates used in the calculation of solvency liabilities increased during the month. As a result, the solvency liabilities decreased by 0.3% for a medium duration plan. For this type of plan, an investment in the 60/40, the LDI or the HD portfolio resulted in an increase of the solvency ratio.

The graph shows the asset allocation 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, 2017 as well as the asset allocation of the three typical portfolios.

Evolution of the solvency ratio as at August 31, 2018 for three different portfolios

Since the beginning of the year, driven by positives returns in Canadian equity markets, global equity markets (CAD) as well as alternative investments, the 60/40 portfolio, the LDI portfolio and the HD portfolio returned 3.2%, 2.2% and 3.5% respectively. The solvency liabilities fluctuated over that same period from 0.4% to 0.7% depending on the duration of the group of retirees. The variation in the plan’s solvency ratio as at August 31, 2018 stands between 1.1% and 3.1%.

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


  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 - September 2018 (PDF)