The average Canadian defined benefit pension plan’s projected benefit obligation fell 3.4 per cent during the third quarter of 2022, from 100.5 per cent to 97.2 per cent, and considerably faster than asset values, according to Aon’s latest pension risk tracker.
While market volatility led to asset values decreasing by 0.1 per cent in the quarter, the more significant dip in DB plans’ projected benefit obligation resulted from a confluence of two other factors: decreasing bond yields and narrowing credit spreads.
During the quarter, bond yields dropped five basis points and credit spreads narrowed by 16 basis points. Together, this led to a decrease in the interest rate used to value liabilities, from 4.83 per cent to 4.62 per cent. Since most pension plans are still exposed to interest rate risk, pension liabilities increased more than asset values shrank due to the the reduction in the discount rate.
“The small reduction in discount rates, coupled with poor return-seeking asset performance over the quarter, reversed some of the increase in funded positions over the previous two quarters,” said Nathan LaPierre, partner in wealth solutions at Aon, in a press release. “Funded positions are slightly better than at the beginning of the year. Plan sponsors should carefully consider de-risking activities as they seek to make better decisions that help maintain those funded positions through the significant volatility we’re currently experiencing.”
Mercer’s quarterly report found similar results, with the average Canadian DB pension plan seeing its solvency ratio drop from 109 per cent to 108 per cent during the third quarter of the year. About 73 per cent of plans within the consultancy’s database have estimated solvency ratios above 100 per cent, down from 72 per cent. Just 11 per cent of plans have solvency ratios below 90 per cent, with five per cent below 80 per cent.
“In spite of the significant market volatility, the financial health of most DB plans would have experienced only a slight decline in the third quarter of 2022,” said Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary, in a press release. “As for what can be expected for the remainder of the year, plan sponsors should continue to expect significant volatility.”