The typical Canadian defined benefit pension plan deteriorated on a solvency basis but improved on an accountancy basis in September, according to a new report by LifeWorks Inc.

Its monthly report on DB pension indices found the average plan saw its solvency index dip from 109.4 per cent at the end of August to 108.8 per cent at the end of September. Its balance sheet index, which provides an indication of changes in the accounting funding level of an average pension plan since the start of the year, rose slightly during September, from 110.3 per cent to 111.1 per cent.

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The apparent disconnect between the directions of the solvency and balance sheet indices is the result of a 7.8 point dip in the pension expense index, which estimates the average plan’s accounting liabilities using a discount rate. It dipped to 70.5 per cent from 78.3 per cent.

In addition, the report found Canadian DB plan returns dropped by 2.5 percentage points during the month. The losses were fuelled by a softening global equity market.

With indications that the world’s central banks were tightening monetary policies, bond yields rose in the second half of the month. In Canada, where the consumer price index reached an 18-year high at 4.1 per cent, long-term Government of Canada bond yields increased by around 19 basis points.

According to Julianna Spiropoulos, partner and head of investment strategy, asset and risk management at LifeWorks, there’s no consensus among market analysts about whether recent increases in inflation is a temporary phenomenon or a long-term trend. She also doesn’t believe there’s consensus on whether the global economy is expected to continue to shrink or grow in the short term.

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“It is crucial for plans to assess the impact of a variety of growth and inflation scenarios on their funded position, their contributions and ability to meet objectives such as cost of living increases,” wrote Spiropoulos in an email to the Canadian Investment Review. “This provides the plan sponsor with information on what economic environments are of most concern, which is useful when making funding, benefit or investment decisions.”

If equities continue to falter and the rate of inflation continues to trend upward, many institutional investors are likely to increase allocations to inflation-linked assets like real estate, infrastructure and real bond returns, notes Spiropoulos. However, she’s cautious about relying on this strategy given the current economic environment.

“Given the uncertainty around markets and economic environments, a well-diversified portfolio that is more global in nature and includes a meaningful allocation to alternative asset classes is typically the most protective, as it does not heavily rely on a specific market or economic environment.”

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