Canadian defined benefit pension plans’ median solvency ratio increased in the second quarter of 2023, according to a new report by Mercer.
The report, which looked at the performance of more than 500 Canadian DB plans in its database, found a rise from 116 per cent to 119 per cent during the quarter.
Meanwhile, a similar report by Aon, found the aggregate funded ratio for Canadian DB pension plans in the S&P/TSX composite index increased from 101.8 per cent to 102.1 per cent during the quarter, with 85 per cent of plans on the index estimated to be in a surplus position on a solvency basis, compared to 83 per cent at the end of the previous quarter.
According to Mercer, the financial position of the median DB plan improved despite lingering concerns about U.S. bank solvency and political wrangling around its debt ceiling, said the report, noting plans also benefited from generally positive investment returns and increases in bond yields, which reduced plan liabilities.
“DB pension plans’ funded positions continue to benefit from higher interest rates, with many plans now in surplus positions,” said Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary, in a press release.
According to Aon’s report, the long-term government of Canada bond yield increased seven basis points during the quarter and credit spreads widened by four basis points. It noted this combination resulted in an increase in the interest rates used to value pension liabilities, from 4.6 per cent to 4.71 per cent.
“The muted asset performance and the small increase in discount rates supported a small increase in funded status over the quarter amid volatility,” said Nathan LaPierre, a partner in wealth solutions at Aon, in a press release. “Pension plans treaded water at healthy funded positions over the last quarter, giving plan sponsors time to consider de-risking activities and shape better decisions.”