Canadian DB pension plans entering 2021 in good financial shape

The aggregate funded ratio for Canadian pension plans in the S&P/TSX composite index increased from 90.8 per cent to 91.2 per cent during the past 12 months, according to Aon’s pension risk tracker.

Aon found the funded status deficit decreased by $200 million, which was driven by asset increases of $18.7 billion and offset by year-to-date liability increases of $18.5 billion. Pension assets returned 9.9 per cent over 2020 and ended the fourth quarter up 3.9 per cent.

Read: DB pensions staring down paltry bond returns in 2021

The year-end, long-term Government of Canada bond yield dropped 55 basis points relative to the last year-end rate and credit spreads widened by 13 basis points, which caused interest rates used to value pension liabilities to decrease from 2.92 per cent to 2.5 per cent. This increase in pension liability offset the positive effect of asset returns on the funded statuses of plans, according to a press release.

“Equity markets performed strongly in 2020 and helped funded ratios improve,” said Erwan Pirou, chief Canadian investment officer for retirement solutions at Aon, in the release. “However, some pension plans didn’t realize the full benefit of the equity market rally, as some active equity managers underperformed their benchmark.”

Nathan LaPierre, partner for retirement solutions at Aon, said despite a “wild ride,” Canadian pension plans ended 2020 in a similar, if not slightly better, funded position to how they began the year. “Plan sponsors who are in de-risking mode should redouble their efforts to lock in improved funded positions, while those with ongoing [defined benefit pension] plans will need to grapple with lower return expectations stemming from ultra-low interest rates.”

Read: Canadian DB plans bouncing back after stock rally: report