The average solvency ratio of Canadian defined benefit pension plans in Mercer’s database grew by seven per cent in 2021, according to a new report by the consultancy.
The report, which looked at the overall performance of more than 500 Canadian DB plans in 2021, found, at the end of the year, the plans’ average solvency ratio reached 103 per cent, up from 101 per cent at the end of the third quarter of the year and 96 per cent at the end of 2020.
Almost two-thirds (61 per cent) of pension plans had solvency ratios above 100 per cent, while more than a quarter (27 per cent) had ratios between 90 and 100 per cent. Just seven per cent had solvency ratios between 80 and 90 per cent and five per cent were below 80 per cent.
With the majority of DB plans registering solvency ratios above 100 per cent, Mercer expects many pension plan sponsors to adopt de-risking strategies. According to Ben Ukonga, principal in the financial strategy group at Mercer, plan sponsors should consider re-evaluating risk exposure in order to ensure recent gains don’t turn into deficits.
“For some plan sponsors, it may make sense to continue with their current risk exposure. For others, it may make sense to lock-in some of these gains by taking risk off the table.”
Mercer’s report also found a typical balanced pension portfolio in its database posted a return of 5.6 per cent in the last quarter of 2021. These gains were led by returns from U.S. equities, which outperformed developed market equities in the second half of the year. Canadian equities lagged behind the global average.
Canadian universe bonds performed well during the final quarter of 2021, despite yields rising 11 basis points. Long-term bond returns were also positive and saw yields dip by 24 basis points.
The results of Mercer’s pension database are reflective of the broader performance of Canadian DB plans. A report by Aon also found the average funded position of DB pension plans on the S&P/TSX composite index rose in 2021, from 89.4 per cent to 97.2 per cent.
“2021 was a spectacular year for Canadian pension plans funding, with both interest rates and risk-seeking assets going up,” said Erwan Pirou, Canada chief investment officer in the wealth solutions group at Aon, in a press release “But with inflation reaching record highs in North America, they will be watching closely if central banks deliver on the expected rate hikes in the next few months and how meaningful they will be. Longer term, ensuring the sustainability of plan assets to climate change is becoming a more pressing issue as well.”