The average solvency ratio of Canadian defined benefit pension plans grew by 10 per cent in 2022, according to a new report by Mercer Canada.

The report, which looked at the overall 2022 performance of more than 500 Canadian DB plans in the consultancy’s pension database, found the median solvency ratio reached 113 per cent by the end of the year, up from 108 per cent at the end of the third quarter.

More than three-quarters (78 per cent) of pension plans had solvency ratios above 100 per cent, up from 61 per cent at the end of 2021. Of the remaining 22 per cent of plans, most (12 per cent) had solvency ratios between 90 and 100 per cent. Just four per cent finished the year with solvency ratios between 80 and 90 per cent and another five per cent with ratios below 80 per cent.

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The improvement in the median solvency ratio came despite asset values remaining almost unchanged from the beginning of the year. According to Mercer, the improved solvency ratios resulted from the 4.25 per cent interest rate imposed by the Bank of Canada, which lowered DB pension liabilities.

According to a press release, Mercer said it expects DB plan sponsors to contend with difficult conditions throughout 2023. “With many of the risks and trends that caused volatility in 2022 still unresolved — notably high inflation, capital market headwinds and geopolitical tensions — 2023 could be a year of further uncertainty and volatility.”

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