Canadian defined benefit pension plans made gains in their solvency position in the third quarter of 2017, according to the Mercer Pension Health Index.
The index, which shows the solvency ratio of a hypothetical Canadian plan, rose to 106 per cent, compared with 102 per cent at the start of the year. Of Mercer’s plan clients, the median solvency ratio rose to 97 per cent from 93 per cent at the start of year.
The boost in plans overall was the result of long-term interest rates rising by 30 basis points, as well as broad strength in equity markets. Offsetting some potential gains, however, was the negative effect of the Canadian dollar’s surge on unhedged foreign assets.
While equities have been strong, some market watchers worry that the long-running bull market has resulted in an overpriced equity landscape. That, as well as the recent spike in geopolitical tensions, are causes of concern for the asset class.
“Canadian DB pension plans remain in strong financial shape,” said Manuel Monteiro, leader of Mercer Canada’s financial strategy group, in a news release. “However, the strength of the Canadian dollar has resulted in a wide disparity in the funded status of pension plans, depending on their currency hedging strategy.”
In Ontario, plan sponsors are keen to learn details of new rules that should help reduce the volatility of cash funding requirements. A welcome change for sponsors, it could put pressure on other provinces to follow suit, the report noted.
The year has been positive overall, according to Mercer. With three consecutive positive quarters, most plans are approximately 15 per cent better funded than a year ago. With the relatively strong positions and new funding rules on the horizon, some plans are managing risk by shifting more capital to bonds and alternative assets from equities, says Monteiro.