The funded position of a typical defined benefit pension plan increased on both a solvency and accounting basis during the month of June, according to the latest pension index from Telus Health.
In June, the solvency of the average DB plan rose to 103.2 per cent, up from 101.4 per cent during the month of May. The balance sheet index, which is an indication of changes in the accounting funding level of an average plan since the start of the year, rose very slightly, from 98.8 per cent in May to 99.9 per cent in June.
For a representative pension plan portfolio, the investment return was 2.1 per cent for the month, driven by mainly positive returns in equity markets.
During the month, the global developed and emerging equity markets index, the MSCI ACWI, returned three per cent in Canadian dollar terms. The Canadian equity index, the S&P/TSX composite, finished the month with a return of 3.4 per cent.
“In June, the Bank of Canada raised its policy rate by 0.25 per cent to 4.75 per cent, its first increase since it paused hiking rates after the January increase,” said Gavin Benjamin, a partner in Telus Health’s retirement and benefits solutions practice, in a press release. “The increase reflected the bank’s view that additional monetary tightening was needed to bring supply and demand back into balance and reduce inflation to the two per cent target.
“Pension plan sponsors should ensure that they identify, measure and manage the risks to their plans from a potential scenario in which inflation continues to be high and economies and financial markets suffer as a result.”
In another report that looked specifically at the Quebec market, the average DB pension plan funded ratio, excluding the effect of asset smoothing, was 119 per cent as at June 30, 2023, down just one per cent over the previous quarter of the year.
The Normandin Beaudry report, which tracks DB plans in the province’s municipal and university sector, noted the financial position was little changed in the second quarter of 2023, as investment performance was similar to expected returns and there was no significant change in the discount rates used to value pension plan liabilities.
In addition, the average pension plan solvency ratio at the end of June was 110 per cent, down just one per cent over the previous quarter, but up three per cent since the beginning of the year. The slight decline stems primarily from higher pension plan liabilities, noted the report.
“Although some organizations feared having missed the opportunity to buy insured annuities at high implied yields at the beginning of the year, this opportunity is back with the most recent rise in interest rates,” said the report. “Other risk reduction strategies may also be appealing for the same reason.”