A first-quarter rally in both the equity markets and bond yields have propelled defined benefit pensions to their best funded positions in more than a decade, according to a report by Morneau Shepell.
Based on raw data from the Canadian Institute of Actuaries and internal sources that Morneau Shepell uses to compile its indices, the firm estimates that many defined benefit plans are in their best funded positions in over a decade. The report shows the progress of various indicators since start of 2021, when each index is reset to the baseline level of 100. At the end of the first quarter on March 31, Morneau Shepell’s solvency funding index stood at 107, while its accounting funding index hit 107.8.
Morneau Shepell attributed the first quarter spike in funding levels to the strong performance of equity markets, combined with a sharp increase in bond yields — which has a suppressing effect on pension plan liabilities. Higher bond yields were also responsible for the large drops in Morneau Shepell’s commuted value index — which fell to 91.9 — and the accounting (pension expense) index, which now stands at just 75.
In a statement accompanying the latest results, Morneau Shepell’s Gavin Benjamin said plan sponsors without a formal de-risking strategy should be thinking about whether or not to lock in gains now as a hedge against future volatility.
“The volatility in the first quarter of 2020 was a wake-up call for many plan sponsors and a reminder that the funded status of a pension plan can deteriorate rapidly if the plan has not been de-risked,” said Benjamin, a partner at the firm. “The rebound in the funded status of many pension plans to levels not seen for over a decade provides a golden opportunity for sponsors to revisit their risk tolerance and adjust the risk profile of their pension plans.”