Canadian public and corporate defined benefit plans administered by Aon Hewitt had a median funded status of 87.6% as of Dec. 16, unchanged from three months earlier but down from 90.6% at the end of last year.
Only 11.8% of the 449 plans surveyed by Aon Hewitt were more than fully funded as of Dec. 16, down 1.8 percentage points from the end of the third quarter and 6.7 percentage points below the end of 2014.
Low bond yields, stock market weakness and changes to mortality tables this year were cited by Aon Hewitt as reasons for the 2015 decline.
The decline in the value of the Canadian dollar had a beneficial effect on pension funds’ U.S. and global investments, Aon Hewitt said in a news release.
“Canada’s declining currency was the silver lining for plan solvency in 2015,” said Ian Struthers, partner, investment consulting practice at Aon Hewitt, in the news release. “While that decline might continue, plan sponsors should not expect a similar outsized currency effect in 2016, and plan solvency will be more exposed to volatile equity markets and continued weak bond rates.”
Two interest rate cuts this year from the Bank of Canada, to the current 0.5%, put downward pressure on bond yields, lowering the discount rate used to value pension liabilities and adversely impacting plan solvency, Aon Hewitt said, but declining yields pushed up the value of Canadian fixed-income holdings, with the FTSE TMX Canada Long Term Bond index up 2.5% year-to-date Dec. 16.
Canadian equities fell 7.4% year-to-date Dec. 16. U.S. equities rose 22.7%, international equities were up 16.8% and global equities jumped 18.7%, Aon Hewitt said. Those foreign gains came as the result of the plunge in the Canadian dollar, which fell by 20% against the U.S. dollar through Dec. 16. Had the Canadian dollar remained stable against foreign currencies, U.S. and international equities would have delivered low single-digit returns and cut the median solvency ratio to 84.4%, according to Aon Hewitt.