Greece heightens solvency risk for Canadian pension plans

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.”