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Greece heightens solvency risk for Canadian pension plans

By Warren S. Hersch

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The financial health of Canadian defined benefit (DB) pensions, which had improved in the second quarter, took a turn for the worse this month amid investor fears about Greece defaulting on its debt, according to a new report.

Aon plc discloses this finding in a summary of results from its quarterly pension plan solvency survey. The report’s conclusions are based on Aon’s Median Solvency Ratio, which measures the financial health of a defined benefit plan by comparing total assets to total pension liabilities in the event of plan termination.

The ratio draws on a large database and reflects each plan’s features, investment policy, contributions and solvency relief steps taken by the plan sponsor. The analysis of the plans in the database takes into account the index performance of various asset classes, plus applicable interest rates to value liabilities on a solvency basis.

“Fears of the impact of Greece’s default on debt payments to the International Monetary Fund (IMF), along with its inability to broker a deal with creditors, have created sharp declines in asset returns and increases in solvency liabilities for Canadian pensions in just a few days,” the report states. “While pension solvency still improved in the quarter overall, the recent downturn suggests that continuing interest rate and equity market volatility present risks to the outlook for plan solvency, [risks] compounded by an expected change in the actuarial treatment of mortality later this year.”

As of June 30, 2015, the median solvency funded ratio for 449 Aon Hewitt-administered DB pension plans from the public, semi-public and private sectors participating in the survey stood at 92.9 percent — a 4.0-percentage-point increase from the previous quarter — and 26.5 percent of surveyed plans were more than fully funded at the end of Q2. These results reverse the prior three-quarter trend of declining solvency, although the median ratio remains below the 96 percent level set in the second quarter of 2014.

Before the events in Greece last weekend, the median solvency ratio for surveyed plans stood at 93.7 percent. This week, amid continuing global equity market uncertainty fueled by Greece’s debt crisis, the solvency ratio declined sharply before bouncing back.

The report questions how great Greece’s impact will be on plan solvency after Sunday’s referendum.

“Pension plans must take a long-term view and not be overly reactive to short-term market moves, but the events of this past week show the need for a disciplined risk management process in volatile times,” says Ian Struthers, Investment Consulting Practice Leader, Aon Hewitt. “In solvency terms, Canadian pension plans remain very healthy, so managing risk effectively is vital to protecting their gains and preparing for the future.”