Tracking the funded status of pension plans as at January 31, 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 newest CIA guidance. 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
During the month of January, Canadian universe bonds, Canadian long term bonds, Canadian long-term provincial bonds, global equities and alternative investments obtained negative returns, while Canadian equity markets showed positive returns. With a return of 0.0%, the 60/40 portfolio outperformed the highly diversified portfolio (HD) (-0.2%) and the low volatility portfolio (LDI1) (-0.6%). The underperformance of the low volatility portfolio (LDI) is explained by higher allocation in Canadian bonds. The prescribed CIA rates used in the calculation of solvency liabilities increased during the month, decreasing the solvency liabilities by 2.0% 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.
The table below shows the impact of past returns on plan assets as well as the effect of interest rate changes on solvency liabilities, based on the plan’s initial solvency ratio as at December 31, 2016.
Please contact your Morneau Shepell consultant for a customized analysis of your pension plan.
- No consideration has been made for contributions paid to the plan or for benefits paid out of the plan.
- Solvency liabilities are projected using the rates prescribed by the Canadian Institute of Actuaries (CIA) for the purpose of determining pension commuted values.
- 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.
- Assets are shown at full market value. Returns on assets are based on three typical benchmark portfolios.
1 Liability driven investment