The median solvency ratio of Canadian defined benefit pension plans rose during the first quarter of 2023, from 113 per cent at the beginning of the year to 116 per cent at the end of March, according to Mercer’s latest pension health pulse.
The measure, which tracks the median solvency ratio of the DB plans in Mercer’s pension database, saw improvements in the first two months of the year, with January’s improvement primarily driven by asset returns and February’s improvement primarily driven by increasing bond yields. However, these were partially reversed in March, with a decline primarily due to decreasing bond yields.
Among the plans in Mercer’s pension database, 83 per cent were estimated to be in a surplus position on a solvency basis at the end of the first quarter of 2023, compared to 79 per cent at the end of the last quarter of 2022.
“While markets continue to be affected by the volatility that was exacerbated by the banking crisis in the U.S. and Europe, the financial health of most DB plans continue to improve, with many plans being in better health than they have been in 20-plus years,” said Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary, in a press release.
During the quarter, Canadian bond prices continued to swing, driven by shifting investor sentiment towards the path of interest rates. Yields declined in January, increased in February and fell again in March, ending the quarter at lower levels. Long-term bonds outperformed both universe and corporate bonds during the period. In addition, mid-term rates remained below both short-term and long-term rates throughout the quarter.
As the year continues, DB plan sponsors will need to be prepared for continued financial market volatility, along with the resulting effect on the financial positions of their plans, according to Mercer, which noted many plans won’t be facing deficit contribution requirements due to the improvements in financial positions in 2022 and many plans are in surplus positions.
However, to maintain these surplus positions, plan sponsors will need to ensure they have the appropriate investment and risk management strategies in place, along with robust governance programs. “As any market observer knows, markets can be — and many times are — volatile,” said Ukonga. “And in order to be able to navigate the volatility, appropriate risk management programs need to be in place.”
In a similar new report, Aon found the aggregate funded ratio for Canadian pension plans in the S&P/TSX composite index increased from 100.7 percent to 101.1 percent during the first quarter of 2023.
The Aon pension risk tracker, which calculates the aggregate funded position on an accounting basis for companies in the S&P/TSX composite index with DB plans, also found these pensions’ assets gained 5.1 per cent over the first quarter of the year.
“The recent issues in the banking system had surprisingly little bearing on overall equity return in the first quarter, as equity markets continued their recovery after a strong Q4,” said Erwan Pirou, Canada chief investment officer at Aon, in a press release. “This was enough to have a small positive impact on funded ratios and more than offset the small negative effect of a decrease in interest rates.
“Many pension plans are looking at ways to protect the current good financial position with de-risking or hibernation strategies as well as pension risk transfer activities.”