Financial market volatility hammers Canadian pension health

With global equity markets and bond yields plummeting, Aon’s median solvency ratio fell 13.4 points to 89.1% from 102.5% in Q4 2019 – the lowest level in more than three years.

The Aon median solvency ratio measures the financial health of defined benefit plans by comparing total assets to total pension liabilities on a solvency basis. Solvency fell by 6.7% in March alone, according to the first quarter report from the professional services firm.

“March might have been the cruelest month for equities, but we are not confident the volatility has ended," said Erwan Pirou, Canada chief investment officer at Aon.

All equity indices declined sharply in the first quarter, with the US S&P 500 falling by 11.8% and the Canadian S&P/TSX composite decreasing by 20.9%.

Median asset returns to the end of Q1 were -6.6%, compared to +1.6% in Q4 2019. Alternative assets also declined, with global infrastructure falling by 22.4% and global real estate falling 21.6%.

“In this environment, it makes sense for pension plan sponsors to consider rebalancing their portfolios to move back to their targets, although constrained liquidity conditions mean they should be very cautious in making trades,” Pirou added. “Sponsors should also remain ready to take advantage of opportunities, which may be arising as market dislocations and tight liquidity conditions create mispricings – which is already the case in credit markets, for example.”

According to William da Silva, Canadian practice director for retirement consulting, the first quarter could be the worst for Canadian pension plans in more than a decade, or perhaps ever. “Volatility and lower asset prices will undoubtedly have implications for pension plan sponsors' risk management strategies and for their cash positions,” he added.

“If they haven't done so already, sponsors need to update their cash-flow projections and review their risk management, and the strategies that are available to manage contributions in the face of deteriorating solvency positions.”

Da Silva says that pension plans should in general stay true to their risk management strategies, taking care not to overreact in the current environment.