The aggregate funded ratio for Canadian defined benefit pension plans in the S&P/TSX composite index increased from 94.8 per cent in the first quarter of 2021 to 95.6 per cent in the second quarter, according to a new report from Aon.
It also found pension assets rose by four per cent during the same period. The rise was credited to positive returns on fixed income assets and continued strong equity market performance. However, long term Government of Canada bond yields dropped eight basis points, while credit spreads narrowed by seven basis points. This combination resulted in a decrease in the interest rates used to value pension liabilities, from 3.06 per cent to 2.91 per cent over the quarter.
Despite a generally flat quarter, Mercer’s quarterly pension health index reached its highest level since its inception in 1999. Its average solvency ratio stood at 100 per cent at the end of the quarter, with just six per cent of plan solvency ratios below 80 per cent.
It found average solvency ratios remained essentially unchanged during the period, despite positive investment returns. These strong returns were offset by both decreases in yields on long-term bonds, as well as by a change in the guidance on estimating the cost of purchasing annuities. These two factors also led to increased liabilities for plans.
“2021 continues to be a good year for DB plans,” said Ben Ukonga, a principal in Mercer’s financial strategy group, in a press release. “The recovery from the lows of March 2020 has been remarkable. But only time will tell whether the improvements will be sustained.”
Among the significant threats to the continued recovery of DB plans, Mercer’s report listed the emergence of vaccine-resistant variants of the coronavirus, geopolitical tensions and rising interest rates.