Pension funds rebound may be short-lived warns Mercer Canada

Current market buoyance is offset by fears of a second wave of coronavirus infections and the pandemic's long-term impact on the economy

Pension funds rebound may be short-lived warns Mercer Canada
Steve Randall

Canada’s pension plans have remained optimistic in the second quarter of 2020 but are things set to change?

A new report from Mercer Canada confirms the bounceback highlighted in Aon’s recent analysis of defined benefit (BD) pension plans but warns that there could be tougher times ahead.

The Mercer Pension Health Index, based on the solvency of a hypothetical DB pension plan, increased from 93% at the end of March to 101% at the end of June. The median rate for all pension plans of Mercer clients was 91% at the end of June, up from 84% at the end of March.

Plans were boosted by double-digit growth in equity markets but the recovery in the second quarter only accounted for half of the losses posted in the first quarter of 2020.

“While the last few months have been painful, most defined benefit plans have emerged from the depths of the crisis in reasonably strong shape,” said Manuel Monteiro, partner, and leader of Mercer Canada’s Financial Strategy Group. “Measured across the backdrop of the 20+ years since January 1, 2000, funded positions have been higher than they are today, less than 30% of the time.”

Large risks
Monteiro added that the risks to pension plans loom large with businesses struggling from the economic impact of the pandemic and equity markets, while gaining, providing some potentially false hope.

“Equity markets have gotten ahead of the real economy and seem highly vulnerable to any disappointing news regarding the strength of economic recovery, the stubborn persistence of the virus, or the development of an effective vaccine,” he said.

Those plans with long time horizons are most at risk with bond yields low and greater allocations to growth assets - required to remain affordable – being more susceptible to market volatility.

“Despite a strong rebound in risk assets as the recovery has continued throughout the second quarter, we remain cautious regarding the long term impact of the pandemic on the economy and markets going forward” said Todd Nelson, partner at Mercer Canada. “Markets have been encouraged by government stimulus efforts, the gradual relaxation of lockdowns and progress on a number of potential vaccines. However, the recent spikes in case numbers in the U.S. and other countries is increasing fears of a second wave of the coronavirus pandemic”.