Heightened volatility could make defined benefit pension plan sponsors pause before deciding how to approach the use of favourable financial positions resulting in surpluses.
While Canadian DB plan sponsors have been in surplus on a going concern basis for a significant amount of time, many are now facing a surplus situation on a solvency basis, says Pierre-Luc Meunier, a partner in the pensions and savings practice at Normandin Beaudry.
“Only the median pension plan right now has a 20 per cent surplus on a solvency basis and over 30 per cent surplus on a going concern basis. . . . This is why we’re having more and more conversations about, ‘what should we do with those surpluses?’”
A recent pension index report from Normandin Beaudry noted ongoing market uncertainty — particularly around the lagging impact of tariffs on corporate earnings — and the concertation effect from equity markets could impact decision making around the use of surpluses.
However, Meunier says volatility isn’t the only reason for pause when it comes to how to engage with surpluses. “What really drives [the] decision is not only this current volatility but all the other factors that are embedded in the decision making about surpluses,” he adds, noting how the plan is funded the plan can play a significant role.
Investment market volatility is top of mind for pension plan administrators, but 2025 has offered a reminder of how intensifying volatility can put pressure on decision making, says Claude St-Laurent, principal of pensions and savings at Normandin Beaudry.
Read: Pension risk transfer market reaching $1.4 billion in first half of 2025: report
“If there’s volatility and if I’m about to make a decision with respect to the use of surplus, is there any chance that I make a wrong decision? Is there any chance I might regret the use of surplus or the use of too much surplus? As much as there’s complexity in the whole spectrum of different pension plans, there seems to be one underlying thing that’s common in all situations, which is that people don’t want to make the wrong decisions.”
The report noted it’s common for DB plan sponsors to put thresholds in place before using surpluses, margins for adverse deviations or surplus use mechanism promoting equitable consideration. It also noted the purchase of group annuities continues to be a preferred strategy when favourable financial conditions in place.
The Canadian pension risk transfer surpassed $11 billion worth of transactions in 2024 with inflation-linked annuity market surpassing $3 billion, according to a recent report from Sun Life Financial Inc.