TORONTO – The financial health of Canadian defined benefit plans was eroded in the fourth quarter by a combination of weak equity markets and low long-term interest rates, two pension advisory companies said in separate reports on Thursday.
Mercer Canada and Aon each concluded that fewer than half of the country's defined benefit plans were fully funded at the turn of the year and warned that the current outlook for 2019 is at best gloomy.
They also noted that defined benefit plans – just one of the ways employers can make available to their employees after retirement – were generally in good shape before the fourth quarter began in October.
The report was issued shortly before the North American stock markets closed lower Thursday – continued an uneven downturn that investors experienced in the fourth quarter.
"We do not expect volatility to end in 2019, but the financial position of pension plans remains strong after the longest bull runs in history," said Calum Mackenzie, Aon's Canada Investment Manager.
He said plans were hit by a "double-whammy" of reduced stock prices and lower Canadian long-term bond yields.
Lower bond yields affect defined benefit plans, but increase how much they need to earn from equity, real estate, or other investment.
Both companies noted that part of the fourth-quarter pain was offset by a fall in the value of Canada's dollar, which had a positive impact on USD investments.
"Canadian retirement plans have seen significant results in the fourth quarter, but fortunately they started from a very strong position," said Manuel Monteiro, head of Mercer Canada's financial strategy group.
Mercer Pensions Health Index – based on a hypothetical model plan – fell to a solvency ratio of 102 percent on December 31, from 112 percent. September 28 and from 106 per cent In early 2018.
Meanwhile, Aon Median Solvency Ratio declined to 95.3 percent in the fourth quarter. January 1, 2019, a decline of nearly eight percentage points from the third quarter of 2018.
A solvency ratio of 100 or more indicates that a plan is fully funded while somewhat less indicates there would be some deficiency if a plan were to be settled – often a worst case for defined benefit plans.
Benefit-based pension plans must provide a predictable retirement income for its members, supported by either the plan's own investments or by a combination of investments and additional employer payments.
Mercer Canada estimated that less than 30 percent of Canadian retirement plans were fully funded by the end of 2018, while Aon estimated 38.5 percent of the plans fully funded. January 1, 2019.
Both companies said that the impact on pension sponsors should be minimal because pension assets had been in surplus until the end of 2018.
Mercer also noted that defined benefit plans in Ontario and Quebec jurisdictions will be helped by new provincial laws that will reduce the need for cash infusions when the solvency rate falls below 100 percent.
The share of salaried employees with a defined benefit pension from their employer decreased to 67.3 percent in 2016, from more than 80 percent in the 1980s, according to an annual report from Statistics Canada.
In contrast, approx. 17 pct. Of employees with an employer pension with a defined contribution plan, and a small percentage are covered by a hybrid pension with aspects of both DB and DC plans.
With defined contribution and group pension savings plans – employers make contributions, but are not obliged to deal with declines whose investments do not go well.
Nevertheless, many private sector employees do not have a company pension at all – with fewer than 6.3 million Canadians under a registered pension plan. Of these, 52.3 percent were in the public sector, according to Statistics Canada.