Canada’s defined benefit pension plans improve further

Strong performance in the equity markets and stable interest rates are boosting the health of Canadian pension plans

Canada’s defined benefit pension plans improve further
Steve Randall

Canada’s defined benefit pension plans can de-risk and protect their funding gains thanks to supportive market conditions.

A new report from Aon shows that the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index increased from 94.8% to 95.6% during the past three months as of June 30.

The firm’s Pension Risk Tracker also shows that the value of pension assets gained 4.0% in the second quarter due to positive returns on fixed-income assets and continued strong equity market performance.

"Equity markets continue to do well in the second quarter and, combined with interest rates being fairly stable, this led to further improvement in the funded ratios of Canadian pension plans,” said said Erwan Pirou, Canada Chief Investment Officer, Retirement Solutions, Aon. “As a result, we are seeing more closed or frozen pension clients de-risking and looking at hibernation strategies to protect the gains achieved.”

Credit spreads narrowed

The quarter-end long-term Government of Canada bond yield decreased 8 basis points relative to the last quarter-end rate while credit spreads narrowed by 7 bps. This meant a decrease in the interest rates used to value pension liabilities from 3.06% to 2.91%.

"With healthy funded positions continuing, plan sponsors continue to have options for de-risking and funding their plans," said Nathan LaPierre, Partner, Retirement Solutions, Aon. "The group annuity market continues to heat up, with plan sponsors considering annuity buy-ins and buy-outs to offload some of their pension risks, while also considering performing off-cycle valuations to lock in lower contribution requirements."