A rally on the stock market in the fourth quarter helped boost the strength of Canadian defined benefit pension plans to end 2020, according to a new report by Mercer Canada.
The consulting firm said its pension health index, which represents the solvency ratio of a hypothetical DB plan, rose to 114 per cent at the end of December from 107 per cent at the end of September.
Mercer said in the fourth quarter the funded positions of DB plans continued to recoup the losses incurred in the first quarter helped by the rally in equity markets, aided by higher bond yields and changes to the Canadian Institute of Actuaries’ commuted-value standards.
Ben Ukonga, principal in Mercer’s financial strategy group, said in a press release the funded positions of DB plans endured a gut-wrenching decline in the first quarter, but most are now back at or close to their pre-coronavirus pandemic level.
The median solvency ratio of the pension plans of Mercer clients was at 96 per cent at Dec. 31, 2020, up from 93 per cent on September 30, but down from 98 per cent at the beginning of the year. A solvency ratio of 100 or more indicates a plan is fully funded while anything less indicates there would be some shortfall if a plan had to be wound up. The report said a typical balanced pension portfolio would have posted a return of 5.5 per cent during the fourth quarter of 2020, as equity markets continued to trend upwards while bonds rose slightly.
Equity markets rallied in response to favourable developments on the vaccine front, as well as investors reacting positively to the outcome of the U.S. elections. Emerging market equities led the way, followed by global equities in local currency terms.
Returns for Canadian investors were muted however, as the U.S. dollar weakened against most currencies, particularly those of commodity exporters as investors lowered their demand for safe-haven currencies. The Canadian equity market was also in positive territory over the quarter, with energy reversing the negative trend observed in the third quarter.
Value stocks outperformed growth stocks over the fourth quarter after several quarters of underperformance and are expected to benefit disproportionally in a reopened post-pandemic world.
And global real estate investment trusts posted significant gains over the fourth quarter, as investor optimism spilled into a sector that has faced major setbacks. Credit spreads narrowed as investors flocked into risk assets across the board. As a result, corporate bond returns were modestly positive, outperforming universe and long-term bonds.