Tracking the funded status of pension plans as at July 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
During the month of July, Canadian equity markets, global equity markets (CAD) as well as alternative investments showed positives returns while Canadian universe bonds, Canadian long-term bonds as well as Canadian long-term provincial bonds showed negatives returns. With a return of 0.7%, the highly diversified portfolio (HD) outperformed the 60/40 portfolio (0.5%) and the low volatility portfolio (LDI1) (-0.4%).
The relative outperformance of the HD portfolio is mainly due to excellent returns in alternative investments. The prescribed CIA Annuity purchase rates increased while the commuted value rates used in the calculation of solvency liabilities decreased during the month. As a result, the solvency liabilities increased by 0.6% for a medium duration plan. For this type of plan, an investment in the 60/40 portfolio or the LDI portfolio resulted in a decrease of the solvency ratio while an investment in the HD portfolio resulted in a slight increase in solvency ratio.
The tables 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, 2017 as well as the asset allocation of the three typical 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 2.8%, 1.4% and 3.0% respectively. The solvency liabilities fluctuated over that same period from 0.7% to 1.0% depending on the duration of the group of retirees. The variation in the plan’s solvency ratio as at July 31, 2018 stands between 0.4% and 2.2%.
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