Two measures of defined benefit plans show an uptick in position in the last quarter of 2022
The financial strength of Canadian defined benefit (DB) pension plans increased in the last three months of 2022, to set them up for a strong start to the new year.
Two measures of plans’ financial health reveal the generally positive overview despite challenging market conditions dogged by volatility and uncertainty.
Aon’s Pension Risk Tracker increased to 100.8% from 96.9% at the start of 2022 and 98.7% at the end of the third quarter.
With the yield for the Canadian government’s long-term bond up 160 basis points year-over-year and credit spreads widening by 45 basis points, the interest rate used to value pension liabilities increased from 2.77% to 4.82%.
Pension assets lost 15.6% during 2022.
"The poor asset performance was offset by a substantial increase in interest rates and therefore a decrease in liabilities," said Nathan LaPierre, partner, Wealth Solutions, Aon. "Many pension plans will be starting 2023 in a very good financial position. Plans sponsors can use this favourable position to reduce risk in their asset allocations or through pension risk transfer activities."
The positive start of 2023 is echoed by the Mercer Pension Health Pulse, which shows that the median solvency ratio of the DB pension plans in the firm’s pension database finished the year at 113%, up from 108% at September 30, 2022, and up from 103% at the beginning of 2022.
Of the plans in Mercer’s pension database, at the end of Q4 2022:
- 79% are estimated to be in a surplus position on a solvency basis,
- 12% are estimated to have solvency ratios between 90% and 100%,
- 4% have solvency ratios between 80% and 90% and
- 5% have solvency ratios less than 80%.
Leverage and volatility
While Mercer’s data shows that most DB pension plans are in a better solvency position at the start of 2022 than a year earlier, Ben Ukonga, principal and leader of Mercer’s Wealth business in Calgary, says that when measured on an ongoing basis, the story may be different.
“In addition, for plans that use leverage on the fixed income component of their asset mix and also invest in equities, the financial positions of those plans would have likely decreased,” he said.
He says the challenging times are not over.
“With continued high inflation, capital market headwinds, and geopolitical tensions, 2023 could turn out just as volatile as 2022. As such, plan sponsors should ensure they understand and are comfortable with the risks their plans are exposed to, and if they are not, should take steps now to manage these risks,” he said.