Driven by rosy market conditions, the solvency of Canadian defined benefit (DB) pensions surged in 2019, according to a new report from Aon Hewitt Canada.

The firm said that the solvency status of Canadian DB plans approached record highs at the end of 2019 thanks to a combination of rising bond yields and a rally in equities.

Aon reported that its median solvency ratio increased by 7.2 percentage points in the fourth quarter to 102.5% at the start of 2020.

Additionally, more than half (54.2%) of DB plans started the year fully funded, which is up by seven points over the fourth quarter, and up 16 points year over year.

Aon noted that Canadian bond yields rose throughout the quarter, which positively impacted solvency by decreasing plan liabilities.

At the same time, pension assets rose by 1.9% in the fourth quarter.

“The overall return on assets for the year was 15.9%,” Aon said, noting that all equity classes produced positive returns (in Canadian dollar terms) on both an annual basis and in the fourth quarter.

“A partial resolution of the U.S.-China trade war, the recent UK election and more accommodative monetary policy seemed to put global equity valuations on a surer footing, resulting in overall pension asset returns that easily bested last year’s performance,” said Erwan Pirou, Canada chief investment officer, Aon.

“We are not so confident this sense of renewed optimism will survive 2020, however,” he added. “Global growth remains a headwind to stock valuations, and the forces driving a reorientation of global trade and other economic relationships are still in play, suggesting more volatility ahead.”

Aon said that pension sponsors should be focused on the impact of long-term trends.

“Strong solvency positions give plan sponsors an opportunity to put all of their options for managing volatility and risk on the table, from diversification and outsourced investment solutions to full settlement of liabilities,” said William da Silva, senior partner and Canadian director, retirement solutions at Aon.

“We will see whether the respite from financial market volatility and falling yields lasts, but sponsors should not be lulled into complacency by what could turn out to be a short-term phenomenon,” he added.