The funded status of Canadian pension plans has declined slightly.
The Mercer Pension Health Index stood at 103% on May 31, down from 106% at the start of 2014.
The primary culprit is long-term interest rates, which have fallen by almost 50 basis points since the beginning of the year. This impact has been partially offset by strong equity returns and the positive effect of a weaker Canadian dollar on foreign-denominated assets.
Many plan sponsors were expecting interest rates to continue moving upwards in 2014 and further improve the funded position of pension plans. In fact, the reverse has happened. Ironically, the decline is being partly attributed to the increased demand for long-term bonds from pension plans looking to reduce risk.
“The financial position of pension plans is still relatively healthy, and it remains a good opportunity for plan sponsors to take action. Many have been looking to reduce their risk exposure by increasing fixed income allocations or by offloading portions of their liabilities to an insurance company through an annuity transaction,” says Manuel Monteiro, a partner in Mercer’s financial strategy group. “The minority of plan sponsors that had mapped out a risk management strategy in advance were able to execute quickly when the situation was particularly favourable.”
The current positive pension situation could deteriorate quickly, particularly if equity markets falter or there is continued downward pressure on long-term interest rates. Consequently, Mercer believes there could be a significant early mover advantage for plan sponsors that are able to act quickly to adjust their risk exposure to the desired level.
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