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Canadian pension-plan solvency rates surge in wake of global market rally

A global market rally in the wake of Donald Trump’s election as U.S. President has helped propel Canadian pension plans’ solvency funding rates to their highest levels since the 2007 financial crisis.

A global market rally in the wake of Donald Trump's election as U.S. President has helped propel Canadian pension plans' solvency funding rates to their highest levels since the 2007 financial crisis.

Consulting firm Aon Hewitt's latest analysis shows defined-benefit pension plans saw median solvency rates – a key metric for determining the overall health of pension plans – jump to 96.7 per cent in the quarter ended March 31, up from 94.9 per cent in the fourth quarter of 2016.

It's the highest mark since ratios reached 99.7 per cent in the third quarter of 2007.

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"The equity rally that defined the latter half of 2016 has continued into 2017," said Ian Struthers, investment consulting practice director at Aon Hewitt. "[The rally] was a key driver behind the current solvency ratios."

Speculation that a Trump White House will stimulate economic growth has helped lift stock markets in the United States and Canada to record levels. Bond markets, meanwhile, have been relatively stable.

While Mr. Trump's election was a big part of the rise in solvency rates, Mr. Struthers noted that the strongest performers among risk-seeking asset classes were emerging-markets equities, which returned 10.8 per cent in the quarter. U.S. equities returned 5.5 per cent, while Canadian equities were the worst performing, at 2.4 per cent.

The number of fully funded pension plans jumped to 39.2 per cent at the end of the quarter – a four-percentage-point increase from the previous quarter.

But Mr. Struthers cautioned that capital market conditions appear to be at an inflection point.

"Nothing lasts forever, and there are signs that the so-called Trump rally might be slowing," he said. "It's time for plan sponsors to consider ways to insulate themselves from a potential turn in the markets."

William da Silva, retirement practice director at Aon Hewitt, said pension plans should seize the moment to prepare for future market challenges.

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"With solvency ratios at their best levels in a decade, conditions may not get much better to take meaningful steps in optimizing risk within pension plans," he said. "Many plans that have been on the sidelines waiting for the right time to take action should realize that time may be now."

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