Being early January 2019, it is the time of year when many plan sponsors pay closer attention to the funded status of their plans and start to plan for the year ahead.
Solvency Position at December 31, 2018
Up until the end of September, the financial markets were fairly accommodating to pension plan sponsors – with a slight increase in bond yields, and stock markets generating either small positive returns (with Canadian and Non-US Global Equities), or above average returns (with US Equities). Unhedged pension plans (i.e. those that have not de-risked) generally saw an increase of between 4% to 8% in their funded status over the first 9 months of 2018 due to market conditions alone.
However, things changed drastically in the fourth quarter of 2018. Specifically, global stock markets took a turn for the worse, with most markets down about 8% to 10% in the fourth quarter; and the yields on long-term government bonds decreased by about 0.30% (this reversal has caused solvency liabilities to increase by about 3% to 4% in the fourth quarter). Combined, these factors have erased the improvement in the funded status of unhedged pension plans that was experienced in the first 9 months of the year, and most plan sponsors can expect a slight decrease in their year-over-year solvency funded status.
Nevertheless, with Ontario’s new funding framework taking effect in 2018, solvency special payments will only be needed to improve a plan’s solvency funded status to 85%. In light of these new rules, the solvency position is no longer the main driver for pension funding contribution requirements, like it has been for the last 10+ years. This provides an opportune time for plan sponsors to review their investment strategies and risk tolerances, and to potentially chart a new course for their pension plans starting in 2019. This leads me to speculate as to what plan sponsors will be looking at in 2019…
Items that we are watching in 2019
With the implementation of Ontario’s new funding framework in 2018, it was our expectation that plan sponsors would thoroughly review their investment policy, de-risking strategy, and funding policy in 2018. While some of our clients underwent this exercise in 2018, most of our clients did not. It should be noted that the reason why some of our clients did not undertake this exercise is because they are satisfied with their current investment policy, and the new funding framework did not alter their long-term strategy (this is often the case for sponsors of closed or frozen pension plans that have already set their course for an eventual plan wind-up and have a well-established investment strategy). However, many clients are just now starting to digest the implications of the new funding framework, and 2019 will be the year in which a thorough review of their investment strategy is performed. This is especially true for sponsors who performed a valuation last year and need to make updates to their Statement of Investment Policies and Procedures to comply with the new regulations.
Another item that is on our radar in 2019 is a revision to the actuarial standards of practice for pension commuted values. Specifically, the Actuarial Standards Board is currently reviewing the actuarial standards for commuted value calculations and is proposing some significant changes to the standard. One proposed change that is interesting is that the Actuarial Standards Board is proposing to update the pension commencement assumption from the age that maximizes the commuted value, to be an equal blend of the age that maximizes the commuted value and the age at which the member reaches the earliest unreduced retirement age. This potential change could significantly reduce the commuted values for pension plans with generous early retirement provisions. Other changes being contemplated are tweaks to how the interest rate assumption is established, and special provisions for plans with risk sharing provisions (e.g. target pension plans, multi-employer pension plans, and jointly sponsored pension plans). The Actuarial Standards Board is currently seeking input on their latest exposure draft of the proposed standard (with a comment deadline of January 31, 2019), and is hoping to issue a finalized standard that will become effective in the second quarter of 2019.
As noted in our blog from last year, the PBGF Assessments will be increasing for many plan sponsors in 2019. As noted in that blog, the PBGF Assessment in 2019 will increase by approximately 50% to 80% for many pension plans, and while the actual increase will differ for each plan, the new assessment of 0.015% of PBGF Liabilities could result in substantially larger increases in the PBGF Assessments for well-funded pension plans.
Finally, 2019 is the year that the gradual expansion of the CPP starts. While pension plan sponsors should be considering whether their pension plans should be amended to integrate with the expanded CPP, we see little interest on this topic industry wide. Perhaps this is because the enhancements to the CPP are modest and are being phased in over a seven-year period. While amending a pension plan for integration with the expanded CPP is likely not warranted for a frozen defined benefit plan or a modest defined contribution plan, this should be an item that is more seriously considered for pension plans with the more generous benefit provisions (read, the public-sector plans).
Wishing you all the best for 2019!