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Tracking the funded status of pension plans as at September 30, 2016

This graph shows the changes in the financial position of a typical defined benefit plan with an average duration since December 31, 2015. For this illustration, assets and liabilities of the plan were each arbitrarily set at $100 million as at December 31, 2015. The estimate of the solvency liabilities reflects the new CIA guidance published in August 2016 for valuations effective June 30, 2016 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, 2015

The evolution of the financial situation of pension plans since December 31, 2015

During the month of September, Canadian universe bonds, Canadian long term bonds, Canadian long-term provincial bonds, Canadian and global equity markets as well as alternative investments showed positive returns. With a return of 0.7%, the 60/40 portfolio outperformed the highly diversified portfolio (HD) (0.6%) and the low volatility portfolio (LDI) (0.5%). The outperformance of the 60/40 portfolio is explained by higher allocation in Canadian equities. Annuity purchase rates slightly increased, while the rates used in the calculation of solvency liabilities remained stable during the month, increasing the solvency liabilities by 0.1% 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 tables below 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, 2015 as well as the asset allocation of the three typical portfolios.

Evolution of the solvency ratio as at September 30, 2016 for three different portfolios

portfolio

Since the beginning of the year, driven by strong returns within the Canadian equity and the Canadian fixed income markets, the 60/40 portfolio, the LDI portfolio and the HD portfolio returned 8.0%, 9.1% and 6.0% respectively. The solvency liabilities increased over that same period between 9.7% and 10.9% depending on the duration of the group of retirees. The variation in the plan’s solvency ratio as at September 30, 2016 stands between -4.1% and -0.7%.

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.

News & Views - October 2016 (PDF)