Canadian DB pension plans ended 2023 stronger than they started it

Both Mercer and Aon report decreases quarter-over-quarter but gains for the year

Canadian DB pension plans ended 2023 stronger than they started it
Steve Randall

Canada’s defined benefit pension plans appear to have navigated the rocky road of uncertainty and volatility during 2023 to end the year in a stronger position than they started, according to two reports.

Mercer and Aon have both published their latest assessments of the solvency/funded ratio of pension funds, providing indications of the financial health of the plans, although of course there are other elements.

“It is likely that members of DB pension plans should see improvement in the financial health of their plans,” said Jared Mickall, principal and leader of Mercer’s Wealth practice in Winnipeg. “2023 saw strong equity performance amidst a volatile interest rate environment. The journey for a DB pension plan is very long, and successful pension plan financial management requires navigation of short-term headwinds in order to meet long-term objectives.”

The Mercer Pension Health Pulse (MPHP), tracks the median solvency ratio of the DB pension plans in Mercer’s pension database, was down to 116% by the end of the fourth quarter of 2023 compared to 125% at the end of the previous quarter. However, that’s up from 113% at the beginning of the year.

Although the fourth quarter saw some positive asset returns, they did not offset increased liabilities for plans within the quarter, but those that used fixed income leverage may have experienced stable or improved solvency ratios over the quarter.

Meanwhile, the Aon Pension Risk Tracker calculates the aggregate funded position on an accounting basis for companies in the S&P/TSX Composite Index with DB plans.

It ended the fourth quarter with a funded ratio of 101.8%, down from 105.6% at the end of the third quarter but up from 100.7% at the start of 2023. Pension assets gained 12.4%.

"The past year was volatile for pension plans," said Nathan LaPierre, partner, Wealth Solutions, Aon. "However, most pension plans in Canada will still end 2023 in good shape. Plan sponsors can continue to plan de-risking activities including annuity purchases and hibernation strategies such as liability-driven investing and smart use of diversified growth assets".

Risks and opportunities in 2024

While the solvency ratio improved across the whole year, there is still risk from long-term interest rates on bonds, which ended the year lower than they started, and it is not known if they will stabilize in 2024.

Mercer’s Mickall says that members of Canadian DB pension plans and their sponsors will be keen to maintain solvency ratios above 100% but there are several other risks to their financial health.

“Canadian DB pension plans should continue to be vigilant in the financial management of their plans through appropriate governance and risk management processes,” he said. “A consideration in 2024 will be the role of artificial intelligence as part of pension plan risk management.”

But where there is risk, there is often opportunity for investors and Venelina Arduini, principal at Mercer Canada, sees the potential for this year during likely increased market instability, dispersion, and dislocation from geopolitical risk, inflation volatility, diverging global policies and transition risks.

“These conditions are ripe for dynamic alpha generation,” she said. “Investors should engage with experienced partners and explore dynamic mandates. Agile managers across public and private asset classes can capitalize on opportunities created by these dispersions and risks.”