With 2016 now in the past, it is time for pension plan sponsors to take stock and plan for 2017.
Solvency position at December 31, 2016 – and implications on the funding requirements for 2017
Let’s start with the good news. Canadian equity markets had an excellent year with TSX Composite Index generating a return in excess of 20% and most US equities indexes also had a better than average year posting double digit returns. In addition, while yields on long-term government bonds decreased by over 50 basis points in the first half of 2016, they started to climb in the second half of 2016, and closed the year about 20 basis points higher than where they started. For pension plan sponsors with asset mixes that include equities, we expect that for most plans, these factors will lead an increase of between 5% and 10% in their transfer/solvency ratios over the past year.
In light of the above, plan sponsors who do not have a valuation scheduled in 2017 may wish to consider voluntarily electing to prepare a valuation early to enable them to recalibrate their funding requirements at an opportune time.
However, the picture isn’t that rosy for all pension plan sponsors. Many plan sponsors last filed a valuation report three years ago when interest rates were about 100 basis points higher than where they are today. And while 2016 was a good year in the equity markets, 2014 and 2015 had their ups and downs. Thus, pension plans that last performed a valuation 3 years ago may find that their transfer/solvency ratios have not changed by all that much, or in some cases even decreased, irrespective of the fact that they have been making special payment over the past 3 years. With that said, there is still some good news since the Ontario Government did provide a third round of solvency funding relief which sponsors can still take advantage (see our client memo for more details on these solvency funding relief provisions).
Interest in ‘de-risking’ strategies is increasing
With the run up in the equity markets and increase in bond yields, we have seen an increase in the number of our clients who are currently exploring the use of a ‘de-risking’ strategy.
With competing priorities, it can be a challenge for pension plan sponsors to find the time to consider a ‘de-risking’ strategy. And while we always want our clients to regularly consider their risk appetite and review their investment policy, now may be an ideal time as ever to consider if a change in investment strategy is appropriate for your pension plan.
We are always happy to assist clients in developing and executing a ‘de-risking’ strategy that meets their needs.
Other items that we are watching in 2017
2016 was a very interesting year in the field of pensions. Some of the more interesting events of 2016 include: the expansion of the CPP (and death of the ORPP), Quebec changing their pension funding rules to eliminate solvency funding with an enhanced going concern funding model, the development of a new multi-jurisdictional pension plan agreement, and both Ontario and BC offering temporary solvency funding relief.
In addition, in 2016 the Ontario government released a consultation paper to initiate its review of the solvency funding framework for pension plans (see our previous blog for more details on this consultation paper). This review of the solvency funding framework will likely lead to a reform in the funding rules applicable to defined benefit plans registered in Ontario. We will be sure to monitor developments of this review and keep you informed.
Finally, with the gradual expansion of the CPP that starts in 2019, we expect that 2017 will be the year that many pension plan sponsors turn their minds to whether or not their pension plans should be amended to integrate with the expanded CPP. Plan sponsors will need to consider the objectives of their pension plans, in terms of benefit coverage and cost, and start the process of developing an implementation and member communication strategy.
Wishing you all the best for 2017!