Funded Status Improving for Canadian Plans

inch upThe solvency position of Canadian pension plans improved slightly in the second quarter of 2014.

The Mercer Pension Health Index stood at 105% at the end of June, down from 106% at the start of the year, but up from 104% at the end of March.

From a pension perspective, the story midway through 2014 has been a tug-of-war between long-term interest rates and equity markets.

Long-term interest rates have declined, pushing pension liabilities higher. However, pension assets have grown almost as much as pension liabilities due to strong equity returns and the positive impact of falling interest rates on bond portfolios.

Many plan sponsors were expecting interest rates to continue moving upwards in 2014 and further improve the funded position of pension plans. In fact, the reverse has happened, with long-term interest rates falling by more than 40 basis points during the year. Once again, it shows that pension plans remain largely exposed to significant and unpredictable volatility of interest rates.

The financial position of pension plans remains healthy, and it continues to be a good opportunity for plan sponsors to measure and, if necessary, adjust their risk exposure to their desired level.

“For many, this means reducing their risk exposure by increasing fixed income allocations or by off-loading portions of their liabilities to an insurance company through an annuity transaction” said Manuel Monteiro, a partner in Mercer’s financial strategy group. “We expect annuity market activity to ramp up significantly in the third and fourth quarters of 2014.”