The average solvency ratio of Canadian defined benefit pension plans in Mercer’s database increased five percentage points in the first quarter of 2022, according to a new report by the consultancy.

The report, which assessed the performance of 464 pension plans, found as at March 31, 2022, the plans’ average solvency ratio reached 108 per cent, up from 103 per cent at the end of 2021.

While investment returns were negative for most DB plans in the quarter, bond yields increased between 75 and 134 basis points at different durations, reducing plan liabilities and offsetting the reduction in plan assets from the negative returns, noted the report.

Read: Majority of Canadian DB pension solvency ratios above 100 per cent: report

Three-quarters (75 per cent) of pension plans are estimated to be in a surplus position on a solvency basis, up from 61 per cent at the end of 2021. In addition, 15 per cent of plans are estimated to have solvency ratios between 90 and 100 per cent, while six per cent have solvency ratios between 80 and 90 per cent and four per cent have solvency ratios under 80 per cent.

The report also found a typical balanced pension portfolio would have posted a return of negative 7.1 per cent during the first quarter of 2022, as global equity markets sold off sharply and the U.S. equity market briefly entered correction territory in February, driven by monetary tightening and uncertainty stemming from Russia’s invasion of Ukraine. In addition, the report noted equity volatility was elevated as investors feared the crisis and sanctions against Russia could lead to a material reduction in the global supply of energy and agricultural commodities.

Read: North American markets tumble as Russian forces move on Ukraine

Canadian bond prices declined significantly over the quarter, as universe and long-term bond yields increased dramatically by 110 basis points and 85 basis points, respectively.

In addition, a new report by Aon found the aggregate funded ratio for Canadian pension plans in the S&P/TSX composite index increased to 100.5 per cent from 96.9 per cent over the first quarter of 2022.

It also found the long-term Government of Canada bond yield increased 69 basis points relative to the last quarter-end rate and credit spreads widened by 25 basis points, resulting in an increase in the interest rates used to value pension liabilities (3.71 per cent, up from 2.77 per cent). Pension assets decreased by 7.2 per cent over the quarter, noted the report.

“There has been considerable volatility over the last quarter and increasing inflationary pressures impacting markets,” said Nathan LaPierre, partner in wealth solutions at Aon, in a press release. “Nonetheless, increasing nominal interest rates have likely had a positive impact on pension plans’ funded positions. Plan sponsors should consider taking actions to lock in the gains that they have recently experienced by de-risking plans through asset mix or liability settlement opportunities, preparing them for the volatility ahead.” 

Read: Pensions in position to off load risks: expert