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Tracking the funded status of pension plans as at October 31, 2015

This graph shows the changes in the financial position of a typical defined benefit plan since December 31, 2014. For this illustration, assets and liabilities of the plan were each arbitrarily set at $100 million as at December 31, 2014. This estimate of the solvency liabilities reflects the new CIA guidance published in November 2015 for valuations effective September 30, 2015 or later. In addition, the solvency liabilities for the month of October were adjusted in order to reflect the new mortality table published by the CIA. The following graph shows the impact of past returns on plan assets and the effect of interest rate changes on solvency liabilities.

The evolution of the financial situation of pension plans since December 31, 2014

The evolution of the financial situation of pension plans since December 31, 2014

In October 2015, Canadian bonds showed negative returns, while Canadian and Global equity markets (CAD) showed positive returns increasing assets by 2.0%. Annuity purchase rates increased during the month while the rates used in the calculation of solvency liabilities did not change which, combined with the mortality table change, increased the overall solvency liabilities by 3.0% for the average duration plan and consequently decreased the solvency ratio.

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, 2014.

Evolution of the solvency ratio as at October 31, 2015 for three different groups of retirees

Since the beginning of the year, driven by positive returns in the Canadian bonds and global equity markets (CAD), the plan’s assets increased by 3.1%. The solvency liabilities increased over that same period between 8.8% and 9.4% depending on the duration of the group of retirees. The decrease in the plan’s solvency ratio as at October 31, 2015 depends on the plan’s initial ratio, but stands between 3.2% and 5.8%.

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. This estimate of the solvency reflects the new CIA guidance published January 2015, May 2015, August 2015 and November 2015.
  4. 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.
  5. Assets are shown at full market value. Returns on assets are based on those of the Morneau Shepell benchmark portfolio (60% equities and 40% fixed income).