Canadian DB pension plans continue to get stronger

Two assessments of pension plans show growing financial strength in the quarter ended September 30, 2021

Canadian DB pension plans continue to get stronger
Steve Randall

The performance of equities has continued to support the financial position of Canada’s defined benefit (DB) pension plans according to two separate reports.

The Aon Pension Risk Tracker shows that the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index increased from 95.9% to 96.8% in the quarter.

Assets were flat due to small gains in equities that were offset by losses in fixed income. However, a return of volatility saw a pullback in equity markets at the end of the quarter.

“Coupled with an increase in interest rates which lowered liabilities, funded ratios continued their upward trajectory,” said Nathan LaPierre, an Aon Retirement Solutions partner. “Plan sponsors should be wary of continued uncertainty and look for ways of reducing risk and locking in some of the gains.”  

Meanwhile, the Mercer Pension Health Pulse, tracking the median solvency ratio of the DB pension plans within Mercer’s pension database, was 101% at the end of the quarter, slightly higher than its 100% ratio at the end of the previous quarter.

Risks ahead

Along with equity market volatility, there are some risks ahead for pension plans.

Stagnant vaccination rates, new virus variants, interest rates, inflation, and market reaction to tightening monetary policy are all potential headwinds.

“As the funded position of their pension plans improve, plan sponsors should re-assess their plans’ risk exposures, and decide whether given the improved positions, it’s time to lock in some of these gains. As we all saw in March of 2020, markets can change quickly,” said Ben Ukonga, Principal in Mercer’s Financial Strategy Group. “Having the right plan and strategy in place is essential to ensure a plan can take advantage of market gains and be protected from market declines.”