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Canada’s defined benefit pension plans’ funded positions continue to improve in 2021, ending the first quarter at their highest levels in more than 20 years, according to Mercer Canada’s pension health index.

It found solvency ratios increased from 114 per cent at the end of 2020 to 124 per cent at the end of March 2021, with the median solvency ratio at 104 per cent on March 31, up from 96 per cent on Dec. 31, 2020. Approximately 66 per cent of the pension plans of Mercer clients are estimated to be in a surplus on a solvency basis.

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Despite the negative returns experienced by many pension funds in the first quarter, the funded positions of DB plans improved significantly as long bond yields increased by 77 basis points during the quarter. And while higher bond yields drove negative investment returns in the quarter, this was more than offset by the decrease in liabilities resulting from higher discount rates.

While the continued rollout of coronavirus vaccines and the reopening of the global economy will make a positive impact on DB plans’ funded positions for the rest of 2021 and beyond, any improvements could be countered by risks such as new coronavirus variants, geopolitical tensions and inflation and interest-rate worries.

And while the index said well-funded closed and frozen plans have little upside reward for taking on significant risk, it advised open plans and plans with long time horizons to balance the needs of the plan sponsor and members through realistic contribution rates, risk-sharing design features and broad diversification across asset classes and geographies.

Read: Canadian pension plans average funding positions improved slightly in January: report

Equity markets ended the quarter with slightly positive returns, with Canadian equities outperforming their global counterparts, driven mostly by double-digit returns in the energy and financials sectors. In non-domestic markets, the U.S. outperformed the rest of the world while emerging markets lagged, driven by negative performance in China as onshore markets weakened amid concerns over tighter credit and slowing profit growth. And returns for Canadian investors were muted in the first quarter of 2021, as the Canadian dollar continued to appreciate against most major currencies.

In another report, Aon’s pension risk tracker found the aggregate funded ratio for Canadian pension plans in the S&P/TSX composite index increased from 89.4 per cent to 94.8 per cent during the past three months, as of March 30.

It found pension assets lost value by 2.3 per cent over the first quarter due to negative returns on fixed-income assets, partially offset by strong equity-market performance. In addition, interest rates used to value pension liabilities increased from 2.34 per cent to 3.06 per cent, due to the quarter-end long-term Government of Canada bond yield increase of 74 basis points, relative to the last quarter-end rate.

Read: Funding status down, alternative investments up among DB pension plans: survey