Canada's DB pension plans continue to improve in 2021

Aon's latest assessment of defined benefit pension plans shows an increase in their funded position in the first quarter of 2021

Canada's DB pension plans continue to improve in 2021
Steve Randall

Good news for Canada’s retirement savers, pension funds are continuing to improve their financial health in the first three months of 2021.

The aggregate funded ratio for Canadian defined benefit pension plans in the S&P/TSX Composite Index increased from 89.4% to 94.8% in the first quarter according to the Aon Pension Risk Tracker.

The strong performance of Canadian stocks helped bolster the position of pension funds, partially offsetting negative returns on fixed income assets, although overall assets lost 2.3% of value.

“Equity market performance stayed solid in the first quarter of 2021 following a very strong fourth quarter”, said Erwan Pirou, Canada Chief Investment Officer, Retirement Solutions, Aon. “Combined with a sharp increase in yields across maturity, with the 30-year bond yield reaching its highest level of the past two years, this proved to be very favorable conditions for the financial health of pension plans. We continue to see interest from plan sponsors to diversify the equity risk by allocation to real assets and opportunistic strategies.”

The interest rate used to value pension liabilities increased from 2.34% to 3.06% due to an increase in the quarter-end long-term Government of Canada bond yield relative to the previous quarter, and a narrowing of credit spreads.

This meant that the decrease in asset values was smaller than the decrease in pension liability, increasing the funded ratio.

“Funded positions continued their upward trajectory in the first quarter and accelerating vaccination campaigns have bolstered confidence in an economic recovery. This growing confidence has increased yields over the quarter while stocks have also continued to perform well. Both factors have led to increasing funded ratios”, said Nathan LaPierre, Aon Retirement Solutions partner.

Test case for vaccinations

The vaccination program will play a key role in the Canadian economic bounceback and pension funds will be impacted by the roll-outs here and south of the border.

“The second quarter will be a test case for vaccinations and the ensuing economic recovery. The United States will have a large portion of the population vaccinated in the second quarter – and the question is how effectively will that halt the spread of the virus and fuel the economic recovery?” added LaPierre.