Despite year-to-date asset losses and historically high levels of inflation, most Canadian defined benefit pension plans are reporting increased funded positions in the second quarter of 2022, according to a report by Mercer Canada.

It found the median solvency ratio increased from 108 per cent as at March 31 to 109 per cent as at June 30. At the end of the second quarter, nearly three-quarters (73 per cent) of DB plans are estimated to be in a surplus position on a solvency basis, while 16 per cent of plans are estimated to have solvency ratios between 90 per cent and 100 per cent. Just six per cent of plans have solvency ratios under than 80 per cent and five per cent of plans have solvency ratios between 80 per cent and 90 per cent.

Bond yields across all durations increased between 80 and 100 basis points during the quarter and have increased between 160 and 230 basis points since the beginning of the year. The report noted increasing bond yields have reduced plan liabilities, offsetting the reduction in plan assets leading to continued improvements in the financial positions of most plans.

Read: Canadian DB plans’ average solvency ratio increases to 108% in Q1: report

Canadian bond prices continued to decline, as both universe and long-term bond yields increased by about 90 basis points since the start of the quarter.

While the U.S. equity market underperformed (negative 13.4 per cent) due to its growth heavy composition, the emerging and Asia-Pacific markets outperformed (negative 8.4 per cent) as the reopening of China from coronavirus restrictions resulted in an economic boost. Energy outperformed during the quarter, building on previous gains with global supply still restricted from Russia and Ukraine.

Despite outperforming some global peers during the quarter and benefiting from higher energy prices, which returned 26.2 per cent for the quarter, Canadian equities still posted a negative return as stronger than expected monetary tightening impacted other sectors of the economy.

Read: Average solvency position of Canadian DB pension plans improved in May: report

Volatility also spilled over into the Canadian real estate market, which returned negative 17.8 per cent, with private residential sales activity declining throughout the quarter while new listings increased, causing moderate price declines. However, the report noted office and retail spaces are experiencing a slow recovery, as employees and consumers return to these spaces with minimal pandemic restrictions.

A separate report by Aon found the aggregate funded ratio for Canadian pension plans in the S&P/TSX composite index increased from 100.5 per cent to 101.5 per cent during the past three months.

It found pension assets decreased by 11.9 per cent during the second quarter, while the long-term Government of Canada bond yield increased 77 basis points and credit spreads widened by 38 basis points. The report noted this combination resulted in an increase in the interest rates used to value pension liabilities from 3.78 per cent to 4.93 per cent.

“The rapid rise of interest rates has lowered liabilities, offsetting the poor asset performance over the quarter,” said Nathan LaPierre, partner in wealth solutions at Aon, in a press release. “Plan sponsors are likely to continue de-risking activities to further protect plans’ funded positions as they navigate volatility, be it through strengthening interest rate hedges or risk-transfer activities such as buy-ins and buyouts.” 

Read: DB pension plans saw solvency gains, 5.3% losses in April: report