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Joe Hornyak
Former editor of Benefits and Pensions Monitor and founder of Joe Hornyak Communications
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Ontario Plans Show Resilience
Most pension plans in?Ontario?have been resilient through a year filled with challenges and market volatility, says the Financial Services Regulatory Authority of?Ontario?(FSRA). Its ‘Q4 2022 Solvency Report ’ shows pension fund investment returns for the quarter were just under three per cent while pension plan liabilities continued to benefit from a rising interest rate environment. The majority of plans remained fully funded on a solvency basis at?December 31, 2022. In fact, the median solvency ratio at the end of 2022 returned to the all-time high level it reached earlier in 2022.?"This past year has been difficult as the global economy experienced high inflation, rising interest rates and ongoing market volatility, however the majority of?Ontario?pension plans remained in a well-funded position in 2022," says?Caroline Blouin, FSRA executive vice-president, pensions. "With that being said, we encourage all plan sponsors and administrators to continuously monitor market conditions and manage the plan risks for the years ahead to maintain benefit security for plan members."?The key findings from the report show the median projected solvency ratio was 112 per cent as at?December 31, 2022?– returning to its all-time high – a three per cent increase from 109 per cent as at?September 30, 2022. The percentage of pension plans that were projected to be fully funded on a solvency basis as at?December 31, 2022?was 81 per cent. The percentage of plans falling below an 85 per cent solvency ratio was two per cent, decreasing by one per cent from the end of last quarter. As well, the average fourth quarter pension fund investment returns for 2022 were 2.9 per cent gross and 2.7 per cent net.
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Friction Possible Over Plan Surplus
The aggregate funding position on an accounting basis for FTSE 350 pension funds in the UK remains stable retaining a healthy surplus, despite bond yields falling since the end of 2022, says Mercer’s ‘Pensions Risk Survey’ for January 2023. However, Matt Smith, a principal at Mercer, says while surplus may be the ‘new normal, there is the potential for greater friction between sponsors and trustees on how any surplus is distributed. “The expectation is that 2023 will be a year of further economic challenges with fears of a recession, higher price rises for longer, and further rises in interest rates,” says Smith. “The continued uncertainty is yet another reminder for trustees and sponsors to be proactive in understanding the risks and what actions they can take to mitigate these.” With the spotlight on the growing divide between accounting and regulatory funding requirements, sponsors are, on one hand, increasingly disclosing accounting surpluses on their balance sheets. On the other hand, contributions are still being paid to support journey plans towards a low dependency (on the employer) target. When this position is considered alongside the new defined benefit funding code consultation, there are certain circumstances where this may create friction between trustees and sponsors. “Distribution of surplus is something of a lottery, based on the wording within scheme rules, but additionally, the timeframe to returning any surplus to the sponsor and the tax payable imposes additional barriers to sponsors supporting journey planning with further contributions,” says Smith. “A question that may need considering more broadly, by the government, is whether the current rules around the use or release of surplus remain appropriate in light of the new regulations and funding code, or whether there is an alternative to holding all the assets in the scheme in order to achieve low dependency on the sponsor.”
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