DB pension funding improves in Q3

Canadian defined benefit (DB) pension plans saw a marked improvement in solvency funding in Q3, finds the latest survey by Aon Hewitt.

Read: Understanding DB pension plan contributions

The survey of more than 275 Aon Hewitt-administered pension plans from the public, semi-public and private sectors, indicates that the median pension solvency funded ratio, or the ratio of the market value of plan assets to liabilities, increased to 88% by the end of the quarter.

That’s 11 percentage points higher than at the end of June and 19 percentage points higher than it was at the end of 2012.

The solvency funded ratio measures the financial health of a defined benefit pension plan by comparing the amount of assets to total pension liabilities in the event of a plan termination.

Read: CPP reforms won’t help upcoming retirees

“The significant improvement of solvency ratios in Canadian plans means that the average Canadian DB plan has erased more than 50% of its solvency deficit since the beginning of the year. For the strategic plan sponsor, this result in a significant reduction in their minimum required contributions in 2014 and beyond,” said Will da Silva, a senior partner at Aon Hewitt.

The improved solvency ratio is mainly a result of stronger equity market returns and higher long-term interest rates, which rose by 0.4% in the quarter. Sponsor contributions to the plans to meet minimum solvency funding requirements also helped.

Approximately 85% of the surveyed plans had a solvency deficiency at the end of the third quarter, compared with 95% in the previous quarter.