Canadian pension funds hit hard by global market volatility

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Canadian pension plans took a major hit in January from turmoil in global markets, suffering a drop in their funding solvency as bond yields fell and their investment portfolios posted losses.

Pension consulting firm Aon Hewitt said the median solvency ratio for pension funds it tracks fell by more than 3 percentage points in January alone, ending the month at 82.9 per cent, a sharp drop from 87.6 per cent in mid-December.

Aon Hewitt partner Ian Struthers said funds have faced "an inauspicious start to the year," with Canadian, U.S. and global stock-market returns "all in negative territory."

"It has made January a challenging month for many investors, and even worse for pension plans who have seen declines in risk-seeking assets compounded by lower bond yields," Mr. Struthers said.

Pension plans are fully funded when the ratio of assets and liabilities is at 100 per cent, which means they have enough assets to cover their long-term funding obligations to plan members. Plan sponsors do not have to immediately cover shortfalls, but they must eventually make up the difference with cash contributions if the shortfalls continue.

Only 8 per cent of surveyed plans had a surplus at the end of January, a decline from 10.7 per cent on Jan. 1 and 18 per cent at the start of 2015.

Aon Hewitt tracked returns for 449 defined-benefit pension funds in the public and private sectors that are clients of the firm.

The median funding level for pension plans was almost 91 per cent at the start of 2015, but has dropped sharply as funds faced the double impact of poor returns on their investments and declining bond yields.

In January alone, pension funds lost 1.45 per cent on their investment portfolios and saw 10-year Canada bond yields fall by 17 basis points, or 0.17 per cent, Aon Hewitt said.

Declining bond yields have a major impact on pension funds because they must calculate the size of their long-term funding obligation based on current bond-yield rates.