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Defined benefit

Canadian plans adapting funding strategies, Aon Hewitt says

Canadian public and corporate defined benefit plans have begun adapting to provincial moves in the past two years to ease solvency funding requirements, according to Aon Hewitt's biennial pension risk survey released Thursday.

The 2017 survey of 124 pension plans with a combined C$350 billion ($280 billion) in assets showed that 41% of plans in Quebec, 33% in Ontario and 27% in western Canada — predominantly British Columbia and Alberta — have made changes to their funding strategy in the past two years.

Those funding strategy changes typically involved reducing their minimum funding requirements and moving to more shared risk between sponsors and plan participants, particularly among public plans, said Tom Ault, partner, risk settlement and longevity consulting leader at Aon Hewitt, in an interview. The survey showed 44% of public plans expected to increase the use of shared risk compared with 22% of corporate plans.

The changes were the result of planned or expected pension legislation changes in Canadian provinces, which generally set their own pension laws.

In May 2017, the Ontario Finance Ministry announced a plan to require all DB plans in the province to only value their funding based on a going-concern basis, dropping the requirement to also provide a solvency valuation unless the plan was 85% funded or less. The remaining provinces are expected to follow suit with similar changes to focus more on going-concern funding over solvency.

Quebec in 2016 eliminated solvency valuation requirements entirely for corporate DB plans and enhanced its going-concern valuation rules to increase pension fund contributions. Public pension plans in Quebec were already exempt from solvency valuation.

In 2015, British Columbia extended to 10 years, from five years, the period over which pension solvency shortfalls can be funded.

Separately, 45% of Quebec plans, 21% of Ontario plans and 13% of plans in western Canada have changed their investment strategy in the past two years, the survey said.

The 2017 survey showed that, in some cases, plan sponsors did what they said they would do two years ago in terms of investment changes, said Calum Mackenzie, partner, investment consultant at Aon Hewitt.

In the 2015 survey, 31% of Canadian plans nationwide said they would cut their Canadian equity allocations and 21% said they did so in this year's survey. In real estate, 20% in 2015 said they planned to increase investments in real estate; this year, 21% said they did, Mr. Mackenzie said.

One asset class where plans did not follow through on what they said in the 2015 survey was in long bonds, Mr. Mackenzie said. Twenty-one percent had said they would increase their long allocation bonds in 2015, but in the latest survey, only 2% did.

"Actually, that's positive," Mr. Mackenzie said. "That's pension funds actually responding to market conditions."

The survey was conducted from March to May.