The funded position for an average Canadian defined benefit pension plan improved slightly on both a solvency and accounting basis in June, according to a new report by LifeWorks Inc. (formerly Morneau Shepell Ltd.)
The average solvency ratio was 109.3 per cent in June, compared to 108.2 per cent in May. On an accounting basis, the average pension plan reached 109.4 per cent funded, compared to 108.9 per cent in May.
Despite the increase in June, pension expenses remained far lower than at the beginning of 2021, according to the report, which also noted asset returns for an average plan were about 2.5 per cent in June and year to date, up from one per cent in May.
Similar to the May report, the June instalment also highlighted a flattening of the decline in bond returns. Non-indexed long-term Government of Canada bond yields decreased by 0.2 per cent in June, while real return bond yields decreased by just 0.1 per cent. In May, when real bond returns dipped by almost 0.2 per cent, LifeWorks described the precipitous fall of real bond returns as implying an increased expectation of inflation among investors.
“There appears to be a growing consensus that the current levels of higher inflation will be temporary,” said Murray Wright, principal in LifeWorks’ retirement and financial solutions team, in a press release. “Markets are expecting inflation to cool down towards the end of the year as distortions created by the pandemic work their way out of the numbers.
“That said, there is likely to be a lot of volatility in the coming months as the economy continues to open up. And even if inflation returns to more normal levels, there will be lingering effects from the COVID-19 distortions. One example is the impact on the year’s maximum pensionable earnings and registered pension plan tax limits, which increased by almost five per cent for 2021 due to greater unemployment for lower income Canadians through the pandemic. Due to the nature of the calculations, we expect there to be a similar increase for 2022, resulting in an increase in YMPE and tax limits of around 10 per cent over a two-year period. This will further increase [Canada Pension Plan] contributions in 2022 alongside the planned increases related to CPP enhancements.”
On a global scale, an increase in sovereign bond defaults has continued to drive uncertainty. According to recent research from the Bank of Canada, the value of sovereign debt in default ballooned 48 per cent in the 18 months preceding June 2021, with debt defaults occurring in Argentina, Belize, Ecuador and Suriname and the semi-autonomous U.S. territory of Puerto Rico. Global sovereign debt grew by just 13 per cent during the period.
Efforts to restore the global sovereign bond market have received international support from some of the world’s leading economies. Last year, the G20 and the International Monetary Fund launched an initiative to relieve debt service payments owed to bilateral official creditors in 73 low income countries. Last month, this initiative was extended until the end of 2021.