Canadian pension plans continue to gain strength but face risks

Aon and Mercer trackers both point to rising financial strength

Canadian pension plans continue to gain strength but face risks
Steve Randall

Canada’s defined benefit pension plans remain in good health according to two measures of their financial positions.

The Mercer Pension Health Pulse shows that the median solvency ratio of the plans in its database improved from 116% at the end of 2023 to 118% as at March 29, 2024, with the first quarter of the year proving plans with positive returns from their assets while DB liabilities eased. There was also a rise in the number of plans with solvency ratios above 100%.

“Members of DB pension plans likely saw continued improvement in the financial health of their plans over Q1,” said Jared Mickall, Principal and leader of Mercer’s Wealth practice in Winnipeg. “Solvency ratios were raised by strong equity performance and interest rate increases.”

The situation is particularly important with new risk management guidelines from Canadian Association of Pension Supervisory Authorities (CAPSA) due to be released this year which will likely include topics such as outsourcing, cybersecurity, ESG, and investment governance among others.

However, plans cannot afford to be complacent with potential risks ahead.

Despite the easing of inflation and the BoC’s pause on interest rates, longer term rates remain elevated compared to the start of 2024 and this is a significant risk for many DB pension plans who will need to monitor the trajectory for Canadian bonds as well as the overnight rate.

And while many plans have a surplus, Mercer says using this strategically is key along with investigating the financial impact of options such as contribution holidays, improving benefits or retaining surplus.

“Canadian DB pension plans should take the opportunity to revisit their risk management processes in anticipation of new guidelines from CAPSA. Canadian DB pension plans should also prepare for adverse financial experience,” added Mickall. “Understanding the risks associated with interest rate changes, market volatility, increasing longevity, plan maturity and other risks specific to each DB plan are necessary for a DB plan to meet its long-term objectives. Applying appropriate governance and risk management processes should set a clear path forward.”

Aon pension tracker

Meanwhile, the Aon Pension Risk Tracker reveals that the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index increased from 100.7% to 105.1% during the first quarter of 2024.

“The financial health of pension plans in Canada continues to improve,” said Nathan LaPierre, partner, Wealth Solutions, Aon. “As a result, we expect de-risking and risk transfer activities to continue apace.”

The report shows that pension assets gained 2.9% over the first quarter of 2024.

It also notes that long term Canadian government bonds saw yields gain 32 basis points quarter-over-quarter while credit spreads narrowed by 9 basis points, leading to the interest rates used to value pension liabilities increasing from 4.42% to 4.65%.