Defined-benefit pensions took hit in Q4: reports.
TORONTO • The financial health of Canadian definedbenefit pension plans was eroded in the fourth quarter by a combination of weak stock markets and low longterm interest rates, two pension advisory firms said Thursday in separate reports.
Mercer Canada and Aon each concluded that fewer than half of the country’s defined-benefit pension plans were fully funded at the turn of the new year, and warned that the current outlook for 2019 is murky at best.
They also noted that defined-benefit plans — only one of the ways that employers can provide for the postretirement financial needs of their employees — were generally in good shape before the fourth quarter began in October.
The report was issued shortly before North American stock markets closed lower Thursday — continuing a bumpy downward ride that investors experienced through the fourth quarter.
“We don’t expect the volatility to end in 2019, but pension plans’ financial positions remain strong after the longest bull run in history,” said Calum Mackenzie, Aon’s head of investment for Canada.
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 by increasing how much they’ll need to earn from investments in stocks, real estate or other classes of investments.
Both firms noted that some of the fourth-quarter pain was offset by a decline in the value of Canada’s dollar, which had a positive impact on investments denominated in the U.S. dollar.
“Canadian pension plans took a significant hit in the fourth quarter, but thankfully they were starting from a very strong position,” said Manuel Monteiro, who leads Mercer Canada’s financial strategy group.
Defined-benefit plans are supposed to deliver 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 per cent of Canadian defined pension plans were fully funded at the end of 2018, while Aon estimated 38.5 per cent of plans were fully funded as of Jan. 1, 2019.
Both firms said that the impact on plan sponsors should be minimal because pension assets had been in surplus until the last part of 2018.