In the third quarter of 2018, Canadian defined benefit pension plans reached their highest solvency ratio of any quarter since November 2000, according to Mercer’s latest pension health index.
Representing a hypothetical plan, the index reached a 112 per cent solvency level as of Sept. 28, 2018, up from 107 per cent at the ned of the previous quarter. As well, more than 60 per cent of plans are now fully funded and only five per cent stand at a solvency level below 80 per cent.
Mercer attributed the healthy funded status to a surge in long-term interest rates during the last few weeks of September, which helped decrease pension liabilities. Also, U.S. and international equities did well, while Canadian stocks remained a drag on portfolios.
Read: DB pensions healthier off U.S. stocks gains, increased annuity purchases
“While developed market equities continued to advance in the third quarter, growth has become less synchronized,” said Todd Nelson, principal at Mercer Canada, in a press release. “Emerging markets have shown particularly sensitive to falling demand and a strengthening U.S. dollar.”
However, markets are still uncertain to a degree, according to Mercer. The pace at which central banks will begin to raise interest rates, as well as continuing trade tensions, are contributing to the volatile environment, it noted, though the recently announced replacement for the North American Free Trade Agreement should assuage some worries.
Since the 2016 U.S. election, plan sponsors have seen steady increases in their solvency ratios and some are emboldened in revisiting their strategies of late, according to Mercer. Particularly where plans aren’t fully funded and remain open to new members, managers feel increasingly optimistic about taking on more investment risk.
Read: How the CMHC closed its DC pension and returned to a DB plan
However, other sponsors, such as those with closed or frozen defined benefit plans, could find this landscape an ideal time to de-risk. “The group annuity market has been slower than expected in the first three quarters of 2018,” said Manuel Monteiro, leader of Mercer Canada’s financial strategy group. “We expect very favourable pricing conditions in the fourth quarter as insurers will be looking to meet their aggressive sales quotas.”