The solvency ratio of Canadian pension plans increased significantly between the third and fourth quarters of 2016, according to Mercer’s latest pension health index.
The median solvency ratio for its pension clients jumped to 93 per cent from 85 per cent during that time.
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The rise in long-term interest rates and equity markets, most of which occurred after the U.S. presidential election in November, propelled the improvement in solvency ratios, the report noted. That’s because funds are assuming president-elect Donald Trump’s platform of lower taxes and fewer regulations will trigger significant economic growth.
Interest rates have risen by nearly 70 basis points since the end of the third quarter. Equity markets, which were slightly negative in October, also rallied after the election.
Canadian equities are on track to finish the quarter with a return of 4.2 per cent, Mercer’s Sofia Assaf noted in the release. The financial (12.2 per cent) and energy (8.1 per cent) sectors led the way, with health care partially offsetting the trend at minus 31.6 per cent.
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U.S. equity returns were strong in both American and Canadian currencies (4.9 per cent and 6.9 per cent, respectively). International equities performed well in their local currencies (seven per cent) and delivered just 0.6 per cent in Canadian dollars. Emerging markets underperformed, at minus 2.7 per cent in local currency terms and minus 3.8 per cent in Canadian dollars.
The report also noted many defined benefit pension plan sponsors should still expect to make higher pension contributions. That’s because most filed valuations at the end of 2013 when plans were in better shape. Exceptions are plans registered in Quebec, which follows different funding rules, and plans sponsored by banks, airlines and other federally regulated companies that file valuations every year.
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Plan sponsors are also expressing concerns about social and geopolitical risks, such as aging populations, growing anti-globalization sentiment and increased protectionism in the United States, according to Mercer.
In response, some plan sponsors are reducing risk by increasing their allocation to bonds that better match their liabilities or transferring risk by buying annuities. “The fourth quarter has been one of the busiest periods in the group annuity market, and 2017 seems to be shaping up to be a banner year for these types of risk transfer transactions,” said Manuel Monteiro, leader of Mercer’s financial strategy group, in the release.