Canada’s defined benefit pension plans saw continued improvements in their solvency positions during the second quarter of 2018, according to Mercer’s latest pension health index.
Representing the solvency of a hypothetical plan, the index stood at 107 per cent as of June 29, 2018, up one percentage point from the end of the first quarter. As well, the median solvency ratio for Mercer’s pension clients rose one percentage point in the quarter, to 99 per cent.
Strong equity markets boosted fund performance despite a slight downturn in the final weeks of June, according to Mercer, which noted Canadian bonds and established market equities faired well while emerging market stocks struggled.
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The quarter didn’t see major movements for interest rates, with the Bank of Canada holding steady at an overnight rate of 1.25 per cent and the U.S. Federal Reserve raising its rate by 0.25 per cent to two per cent.
“Canadian pension plans are remarkably well funded, despite the stubborn persistence of ultra-low interest rates,” said Manuel Monteiro, leader of Mercer Canada’s financial strategy group, in a press release.
Geopolitical uncertainty did contribute to increased volatility in financial markets, with rumblings of trade protectionism standing out as a key area of tension. “The return of volatility to financial markets remains a key theme so far in 2018,” said Todd Nelson, principal at Mercer Canada, in the release.
“Equity markets have generally bounced back nicely following the sharp sell-off we saw earlier this year, but ongoing geopolitical issues, combined with rising trade tensions, remain a major concern. Despite the rally we saw during most of the second quarter, the market remains sensitive to these overriding issues.”
With the possibility of further risk ahead, sponsors with closed and frozen plans should seriously consider a de-risking strategy, Mercer noted.
“Many of these plans are far too exposed to investment risk given their strong funded position and shrinking time horizon. The upside benefit of generating further surplus is far outweighed by the downside risk of large deficits re-emerging,” said Monteiro.
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