While a typical Canadian defined benefit pension plan saw negative investment returns in March, it also improved on a solvency and accounting basis, according to a new report by LifeWorks Inc.
Last month, the typical DB pension plan used in LifeWork’s monthly pension indices saw investments dip in value by 0.4 per cent as a result of the poor performance of bonds. The yield curve flattened as short-term Government of Canada bond yields increased by about 80 basis points and by 25 basis points for the 30-year term bond. Mid-term bonds saw corporate credit spreads increase by about 0.1 per cent, but remained relatively stable.
Equities, particularly domestic equities that benefitted from strong commodity prices, performed well in March. The global developed and emerging market equity markets index rose 0.6 per cent in Canadian dollar terms, while the Canadian equity index made gains of four per cent.
At the same time, the typical plan saw its solvency ratio improve by 2.5 per cent and its accounting ratio improve by 4.9 per cent. The pension solvency index, which provides an indication of changes in the solvency funding level of an average pension plan since the start of the year, reached 101.3 per cent, after falling to 98.8 per cent in the previous month. The balance sheet index, which provides an indication of changes in the accounting funding since the start of the year, rose to 107.1 per cent, up from 102.2 per cent at the end of February.
The health of the average DB plan may mean it’s prudent for plans to pursue de-risking strategies. In a press release, Murray Wright, associate partner in LifeWorks’ retirement and financial solutions team, said the window of opportunity to settle benefits may be closing.
“For some [plan] sponsors, this is the dream ticket: to settle benefits, including securing benefits for members with an insurer to remove all risk, get the plan off their balance sheet and provide members with their benefits in full in a very secure way at little or no additional funding. If this is the objective, then [plan] sponsors need to immediately identify if they can take advantage of these market conditions before the opportunity passes. There is often little upside and lots of downside when you get to this position.”