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Companies do not have to immediately fund shortfalls in their pension plans, but must record the costs in their financial statements and must contribute cash to make up the gaps if they persist over time.Kenneth Mellott/Getty Images/iStockphoto

Canadian pension plans have inched their way back toward stronger health over the past two months after seeing their funded status tumble during a weak start to 2016.

An Aon Hewitt survey of 449 pension plans in Canada shows a median solvency ratio of 87.1 per cent as of June 1, up one percentage point from 86.1 per cent as of May 1 and 83.1 per cent at the start of April.

Pension plans are 100-per-cent funded when they have investment assets equal to the estimated long-term cost of providing pensions for plan members.

The median funding level for pension plans was almost 91 per cent at the start of 2015, but slid throughout the year as interest rates declined, and fell even further in the first two months of 2016 because of roller-coaster volatility in equity markets. The median funding level fell below 80 per cent in mid-February and ended the month at 80.8 per cent.

Aon Hewitt said 10.7 per cent of pension plans had a surplus – which means they were more than fully funded – as of June 1, an increase from 9.6 per cent on May 1.

The return to health in May was driven by gains in U.S. and global equities, while Canadian and emerging market returns were lacklustre, Aon Hewitt said.

Ten-year Canada bond yields fell by 22 basis points in May, which was bad news for pension plans because they must calculate the size of their funding obligation using long-term bond rates. Aon Hewitt said the solvency liabilities climbed in May, which moderated the positive impact of asset returns.

Companies do not have to fund shortfalls in their pension plans immediately, but they must record the costs in their financial statements and must contribute cash to make up the gaps if they persist over the long term.

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