What do historically low interest rates mean for DB pension de-risking?

Increasing yield for long-term government bonds and a flat credit spread through the third quarter of 2021 are driving up defined benefit pension liabilities, according to a new report by Aon.

In the third quarter of 2021, long-term Government of Canada bond yields increased by 14 basis points while credit spreads remained largely unchanged. According to Aon, this has resulted in a 4.4 per cent jump in the interest rates used to value pension liabilities, from 2.92 per cent to 3.06 per cent.

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While overall gains were relatively flat, gains from equities managed to outsize losses from fixed income allocations. The aggregate funded ratio for Canadian DB pension plans in the S&P/TSX composite index increased from 95.9 per cent to 96.8 per cent over the quarter.

In a press release, Nathan LaPierre, partner in retirement solutions at Aon, noted a return of volatility in the quarter. “With the pullback in equity markets in September, equities were up only slightly over the quarter. Coupled with an increase in interest rates which lowered liabilities, funded ratios continued their upward trajectory.”

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