The solvency position of Canadian pension plans rose in the second quarter of 2015 because of rising interest rates.
The Mercer Pension Health Index stood at 100% on June 26, up from 94% at the end of the first quarter.
Read: Pension plans’ funded status dips
Long-term interest rates rose by 50 basis points in the quarter, pushing pension liabilities for most pension plans down by between 5% and 8%. However, asset returns were poor in the second quarter due to sputtering equity markets, and the negative impact of rising interest rates on bond portfolios.
“Pension plans remain exposed to significant risk, particularly the possibility of an equity market downturn or another drop in interest rates.” says Manuel Monteiro, leader of Mercer’s financial strategy group.
“With funded positions being relatively healthy, it is an opportune time for plan sponsors to adjust their pension risk exposure to their desired level,” he adds. “For many, this means reducing their risk exposure by increasing fixed income allocations or by offloading portions of their liabilities to an insurance company through an annuity transaction.”
After successive record-breaking years in 2013 and 2014, the annuity market has been remarkably slow in the first half of 2015. Mercer recommends that plan sponsors interested in an annuity transaction should position themselves to take advantage of attractive pricing with insurers likely to narrow profit margins in the second half of 2015 to meet their ambitious targets.
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