The solvency health of Canadian pension plans continued to improve sharply in the fourth quarter of 2013 due to strong equity returns and rising long-term interest rates.
The Mercer Pension Health Index stood at 106% at the end of December, up from 82% at the start of the year and 98% at the end of September. The index is now at its highest level since June 2001.
“It’s hard to overstate how good 2013 was for most DB pension plans,” says Manuel Monteiro, a partner in the company’s financial strategy group. “Stock markets soared, long-term interest rates rose sharply, and the Canadian dollar weakened, which further magnified foreign returns.”
The index tracks the funded status of a hypothetical DB plan. While there is wide variance in the funded status of Canadian pension plans, most plans exhibited a considerable improvement in funded status in 2013.
A typical balanced pension portfolio returned 12.8% last year.
In Canadian dollar terms, American and international equities had their strongest performance in over 20 years, with returns of 41% and 32%, respectively. That was due to the stronger economy and a falling Canadian dollar.
The strong equity performance more than offset negative returns on bonds arising from the continued rise in interest rates experienced this year.
“After 12 stomach-churning years of turbulence, many plan sponsors will agree in retrospect that they were too exposed to pension risk. With plans approaching fully funded status again, this is the perfect opportunity for plan sponsors to hit the reset button and reconsider their strategy,” Monteiro adds. “Sponsors need to act decisively. As we have seen in 2001/02, 2008 and again in 2011, the situation can reverse rapidly.”
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