Human resources consultant Mercer says the solvency ratio of a typical Canadian pension plan fell by seven per cent last month, when financial markets were rocked by renewed fears about the eurozone crisis.
It says May's seven per cent decline on its pension health index represents a larger movement than is usually recorded during an entire quarter.
Mercer says that dropped most plans into negative territory for the year, more than reversing gains made in the first four months of the year.
Equity markets were down five to seven per cent during the month while Canadian long bond yields fell by 30 basis points to their lowest level in several decades.
The solvency ratio is the amount of money available to pay for earned benefits — known as liabilities under a plan — compared with the cost of buying annuities to cover those benefits in the event of an immediate plan windup.
Mercer's pension health index, which shows the ratio of assets to liabilities for a model pension plan, was at 63 per cent at the end of March. The ratio has been arbitrarily set to 100 per cent at the beginning of the period.
The index assumes contributions equal to current service cost and no plan improvements with 50 per cent active members and 50 per cent retired members.
Scott Clausen, partner, retirement, risk and finance said May's volatility is a reminder of the risks that pension plan sponsors face, though monthly variances don't impact pension payouts to plan members.
"May was a little painful for pension plans, it had that perfect combination of falling equity markets and falling bond yields," he said.
"That's a very large drop for a single month period compared to many of the updates that we've done where in a quarter it moves up or down a few per cent."
Short-term pension volatility is a concern for companies and plan sponsors and can impact their quarterly bottom lines because under new international accounting standards pension obligations are recorded reflecting current valuations. If present levels persist, that could ultimately alter their contribution requirements.
Mercer's next regular quarterly update is expected at the end of June.