“Plans are, for the first time in a long time, in a position to off-load risk,” says Murray Wright, one of the contributors to LifeWorks Inc.’s monthly report on Canadian pensions.
According to Wright, the principal of retirement and financial solutions at LifeWorks, pension chief financial officers are paying particular attention to one number found in his company’s latest report — the accounting (pension expense) index, which provides an indication of changes in the following year’s pension expense since the start of the year.
Read: Canadian DB pensions’ funding positions improve in June as bond returns level off: report
“This is an indicator that CFOs are super interested in. When they’re looking to next year’s budget, this indicates a decent drop in their pension [profit and loss] numbers,” he says.
Like all other LifeWorks pension index numbers, the index begins each year at 100. This year, the index saw a precipitous drop over the course of the first quarter, falling 25 points by the end of March. Since then, it has crept back to 78.3.
According to Wright, the index is closely correlated with interest rates. “The reason for that [decrease] over the year is, I believe, that as more and more good news has come out about the pandemic, that’s driven money from bonds into equities — and that’s good news for the economy.
“The pension expense is really driven by the underlying discount rate. What is driving that volatility is double A-rated corporate bond yields. The accounting numbers are all based on corporate bond ratings.”
Read: Canadian DB pension plans see improved funded positions in Q1: reports
It isn’t the only good news for pensions that can be found in the latest pension index report. It found the average Canadian defined benefit pension plan saw its solvency ratio rise to 109.4, up from 108.7 at the end of July. This sets a new high-water mark for the index this year, which had previously been set in June, when it hit 109.3.
In addition, the report found Canadian DB plan investments grew by 1.2 percentage points during the month. The modest gains were fueled by a strong global equity market, which generated gains of about 3.6 per cent in Canadian dollar terms. Gains from domestic equities lagged somewhat, with the S&P/TSX composite index up just 1.6 per cent over the month.
Read: Top U.S. DB plan funded ratios see first dip since September 2020: report
Portfolio growth was sapped by rising bond yields, while corporate bond yields increased only marginally and long-term government bond yields increased by about three basis points. “Things have come to a really good position for pension plans,” says Wright. “I don’t know that anyone would have expected that.”