A typical Canadian defined benefit pension plan’s funded position improved on a solvency basis and decreased on an accounting basis in April as a result of the strong performance of domestic equities and decreases in bond yields, according to a new report by Telus Health.
During the month, the solvency of the typical Canadian DB plan rose by 0.3 per cent, finishing at 102 per cent of its value at the start of the year as a result of improving asset values and diminishing liabilities. The balance sheet index, which notes changes in the typical accounting funding level, fell 1.3 per cent in March. It finished the month at 98.5 per cent of its value at the start of the year, reflecting rises to the discount rate.
The index calculates the investment performance of a typical Canadian DB plan by tracking Telus Health’s benchmark portfolio. Its assets are evenly divided between public equities and fixed income. Global equities make up 70 per cent of the equity portion, with the rest made up of Canadian domiciled equities. About 48 per cent of the fixed income portfolio is made up of long-term Government of Canada bonds and another 48 per cent of Canadian corporate bonds. The remaining four per cent is allocated to Canadian treasury bills.
The report found the typical DB plan’s asset values grew by 1.9 per cent in April, finishing at 105.2 per cent of its value at the start of the year. The gains stemmed from the performance of equities.
The most significant gains in the month stemmed from allocations to domestic markets, with the S&P/TSX composite index rising 2.9 per cent. Allocations to global equities, as measured by the MSCI ACWI composite index, gained 1.7 per cent.
Falling bond yields also helped improve the financial position of the typical DB plan. Short-term Government of Canada bond yields fell by 0.09 per cent and long-term bond yields were down 0.06 per cent. The break-even inflation rate fell 0.05 per cent to 1.63 per cent, signalling an improvement in investors’ consensus view on long-term inflation.
The report noted the performance of pension plans was hampered by the impact of higher interest rates, turbulence in the U.S. banking system and concerns that the U.S. may be forced to default as a result of political wrangling around the raising of its debt ceiling.
In a press release, Murray Wright, associate partner in the retirement and benefits solutions practice at Telus Health, said these considerations are increasing interest in de-risking strategies among DB pension plan sponsors. “There is also more activity in the pension risk transfer space given that a larger proportion of plans are in a position to secure annuities for some or all of their members.”
Another issue driving interest in annuitization is the passing of Bill C-228. The bill, which will provide super-priority to pension plan members in the event of plan sponsor bankruptcy, is widely expected to lead to an increase in the cost of credit accessible to DB pension plan sponsors when it comes into force in 2027.
“While many plans can continue to look beyond current volatility to the long term, there are opportunities for plans to take a different approach given the new economic and legislative environment we find ourselves in,” said Wright.