'Take action to really understand your plan and how it behaves in response to different economic conditions,' urges chief actuary at FSRA
Despite the upheaval triggered by US President Donald Trump's ongoing trade war, Ontario's pension plans remained remarkably resilient through the first quarter of 2025.
That's the message behind FSRA's latest Q1 2025 solvency report for DB pension plans. And Lester Wong, chief actuary at the Financial Services Regulatory Authority of Ontario (FSRA) believes that stability isn't an accident but rather the result of deliberate strategy.
“Pension plans have been quite resilient over time, not just in this current environment that we’re in,” Wong said, pointing to FSRA’s quarterly report, noting a solvency ratio that's been trending upward since early 2020.
While he doesn’t credit any single factor for that durability, he emphasized a culture of cautious planning among plan sponsors.
“Pension plan administrators take their fiduciary roles fairly seriously,” he noted. “They’ve done a really good job over time of managing their pension plans and understanding and managing the risks that the plans are exposed to.”
However, Wong underscored that FSRA's solvency data is a snapshot, not a forecast, emphasizing that short-term changes don't directly predict future solvency levels.
In Ontario, where there are no strict minimum funding requirements, any deficits might lead to additional contributions, which in turn could strengthen a plan’s funding position over time.
“If you were a pension plan, you could compare how your plan’s solvency ratio reacted compared to what we’re showing here,” he noted.
For Wong, the goal isn't to predict outcomes, but to equip administrators with the information thy need to evaluate their plan’s performance and prepare for various scenarios.
One approach Wong highlighted is the growing emphasis on stress testing. He defined stress testing as simulating negative scenarios to assess how a pension plan would hold up.
“It’s really a matter of long-term planning,” Wong said. “What would happen if certain factors didn’t go the way you thought? How does that affect your plan?”
But he also added that there’s no single formula.
“Stress testing is sort of an umbrella,” he noted. “There’s different tools and different approaches.”
That’s why FSRA leaves it up to administrators and their advisors to decide which models fit their plan structure and risk tolerance.
Wong also noted that many pension plans rely on asset liability modeling (ALM) as a key tool for understanding their financial health. This approach examines both sides of the balance sheet - assets and liabilities - to evaluate how they interact over time.
Larger plans often conduct full ALM exercises every few years, while smaller or less resource-intensive efforts may occur in between. Wong also pointed to other methods, such as deterministic modeling, where plan sponsors adjust key financial variables like interest rates or equity market performance to see how those changes might affect plan outcomes.
FSRA’s report on pension resilience is essential for plan sponsors because it underpins the financial security of retirees by ensuring a stable and reliable income throughout retirement, even amid economic uncertainty, explained Wong.
It also helps sustain confidence in retirement systems, protects against market volatility, and supports long-term benefit sustainability. Effective risk management and strong governance practices foster trust among stakeholders, plan members, administrators, and regulators while also demonstrating a proactive approach to navigating economic challenges.
Solvency ratio post-tariffs
That perspective matters when navigating volatile global events over time, added Wong. Particularly, an abrupt tariff hike from the US which was announced earlier this year on April 2. Although that decision came days after FSRA’s Q1 reporting cutoff, Wong’s team moved quickly to model its possible consequences.
“We estimated that the solvency ratio would have dropped maybe by another 5 per cent from the quarter end,” he said, noting it would bring the ratio from 119 per cent down to 114 per cent, still well above solvency requirements.
Wong attributed the three-point drop in the Q1 2025 solvency ratio, from 122 per cent to 119 per cent to two primary factors. The first was a decrease in the solvency discount rate, which increased the liabilities used in the ratio calculation. The second was a modest investment return of 0.9 per cent for the quarter, slightly underperforming expectations and insufficient to offset the rising liabilities.
He also compared the impact to early COVID-19 volatility, which saw solvency ratios fall by 14 per cent, underscoring that recent market activity suggests ratios may have improved since the report.
However, Wong cautioned against overemphasizing any single economic trigger.
“I don’t think pension plans should focus on sort of single factors,” he said, urging plan administrators to use forward-looking stress testing and analytical tools to prepare for a range of scenarios.
“Do your work to understand your plan and figure out what strategies and risk management approaches and investment strategies would work best,” he said, urging a forward-looking approach to plan governance.
Wong made it clear that without these forward-looking tools, plans risk getting blindsided. He emphasized the importance of proactive engagement.
“Be proactive. Take action to really understand your plan and how it behaves in response to different economic conditions,” Wong said. “We’re hoping that they’ll step up and do more things that can help them have better outcomes for pension plan beneficiaries,” he said.
Wong also urged plan sponsors to lean on their advisors if needed and to keep members informed.
“Communicate with plan members so that they understand the plan and value it,” he said.
