Canada’s defined benefit pension plans improved on both a solvency basis and an accounting basis in October, according to a new report by LifeWorks Inc.
The monthly pension indices report found the average Canadian DB pension plan saw its solvency ratio rise to 103.2 per cent, up 3.1 per cent from the previous month. On an accounting basis, it improved 3.8 per cent, rising to 104.7 per cent during the month. In October, the median plan returned 1.8 per cent, though values were an average of 13.9 per cent lower than at the beginning of the year.
The modest gains were fuelled by a strong Canadian equity market, with the S&P/TSX composite index generating gains of about 5.6 per cent in Canadian dollar terms during the period. Globally, equities performed well in both developed and emerging markets, with the MSCI ACWI composite index generating average returns of 5.3 per cent.
However, fixed income portfolios didn’t fare as well. Non-indexed short-term Government of Canada bond yields increased by just 0.13 per cent, while long-term ones rose by 0.23 per cent. This brought the break-even inflation rate, which provides an indication of long-term inflation expectations, to 1.97 per cent from 1.65 per cent at the end of September.
In the report, Catherine Lai, associate partner in LifeWorks’ retirement and benefits solutions practice, said the year-over-year equity losses and bond yield rises felt by most DB plans are likely to effect plan sponsors’ year-end budgeting. She noted some plans with negative returns could see a decrease in their 2023 costs relative to budgeted figures if they follow the International Financial Reporting Standards.
“This is because the discount rate used to measure a plan’s liabilities and service cost under IFRS, which is based on corporate AA bond yields, has increased dramatically so far this year, which has acted to decrease both plan liabilities and the service cost on an accounting basis.”
DB pension plans reporting under Canadian accounting standards for private or not-for-profit organizations won’t enjoy the same liability reductions, she added. “[These pension plans] may experience a material negative pension-related hit to their year-end balance sheet and/or net income, as well as a higher than expected 2023 pension accounting cost.”