With global equity markets and bond yields plummeting as the coronavirus spreads throughout the world, the solvency positions of Canadian defined benefit pension plans declined by more than 13 percentage points from Q4 2019, representing the lowest level of financial health since November 2016 , according to the first-quarter Median Solvency Ratio Survey by Aon plc (AON), the leading global professional services firm providing a broad range of risk, retirement, and health solutions.

“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. “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.

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. In the short term at least, we expect suppressed bond yields and volatility to continue, meaning pension plans must continually re-evaluate their risk mitigation strategies.”

“The first quarter of 2020 is shaping up to be the worst for the Canadian pension plans in more than a decade – perhaps ever,” said William da Silva , Canadian Practice Director, Retirement Consulting. “Volatility and lower asset prices will undoubtedly have implications for pension plan sponsors’ risk management strategies and for their cash positions.

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. There might also be opportunities in the pension risk transfer market for plans that have been waiting to transact, given bond volatility. In general, though, we believe it is a best practice for pension plans to stay true to their risk management strategies. Now is the time to react in a measured fashion – not overreact to market conditions that are still in a state of flux.”

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