TORONTO – The financial health of Canadian pension funds with defined contributions was destroyed in the fourth quarter with a combination of weak stock markets and low long-term interest rates, two separate reports on two pension advisory firms said yesterday.
Mercer Canada and Aon concluded that less than half of the defined benefit plans in the country were fully funded at the end of the new year and warned that the current prospects for 2019 are unclear at best.
They also noted that defined benefit plans – only one of the ways employers can secure the financial needs of their retirees after retirement – were generally in good shape before the start of the fourth quarter of October.
The report was released shortly before the stock market in North America closed down Thursday – continuing with an uneven driving that investors experienced in the fourth quarter.
"We do not expect the volatility to end in 2019, but the financial positions of the pension plans remain strong after the longest bull in history," said Kalum Mackenzie, head of investment for Canada for Aon.
He said the plans had been hit by a "double impact" on declining stock prices and lower Canadian long-term bonds.
Lower yields on bonds affect defined benefit plans, but increase how much they will need to make from investments in stocks, real estate or other classes of investments.
Both firms noted that part of the pain in the fourth quarter was offset by a decline in the dollar's dollar, which had a positive impact on investments denominated in the US dollar.
"Canadian pension plans in the fourth quarter recorded a significant hit, but fortunately they started from a very strong position," said Manuel Monteiro, who heads the financial strategy of Mercer Canada.
Mercer's health insurance index, based on a hypothetical model plan, fell to a solvency of 102 percent on December 31 from 112 percent to 28 September and from 106 percent at the start of 2018.
Meanwhile, Aon's average solvency rate fell in the fourth quarter to 95.3 percent since January 1, 2019, a decline of nearly eight percentage points from the third quarter of 2018.
The solvency ratio of 100 or more indicates that the plan is fully funded, and somewhat less indicates that there will be a disadvantage if a plan needs to be completed – often the worst case scenario for defined-benefit plans.
Defined benefit plans should provide a predictable retirement income for their members, supported by their own investment in the plan or through a combination of investment and additional payments to the employer.
Mercer Canada estimates that less than 30 per cent of Canadian pension plans are fully funded at the end of 2018, while Aon estimates that 38.5 per cent of the plans are fully funded from January 1, 2019.
The two companies say that the impact on sponsors of the plan should be minimal, since the funds for pensions were in excess until the last part of 2018.
Mercer also noted that defined benefit plans under the jurisdiction of Ontario and Quebec will be assisted by new provincial legislation that will reduce the need for cash infusions when solvency rates fall below 100 percent.
The percentage of paid workers with a defined benefit benefit from their employer has fallen to 67.3 percent in 2016, from over 80 percent in the 1980s, according to Canada's annual report.
By contrast, about 17 percent of paid workers with an employer's pension are covered by a defined contribution plan, and a smaller percentage is covered by a hybrid pension with aspects of DB and DC plans.
With defined contribution plans and plans for saving group pension rates – employers provide contributions, but are not obliged to make short falls if the investment fails.
However, many private sector employees do not have a pension at all in the company – with fewer than 6.3 million Canadians under a registered pension plan. Of these, 52.3 percent are in the public sector, according to statistics Canada.