After December 2018 wreaked havoc on the markets, ending the year on a sour note for many Canadian defined benefit pension plans, most of the damage was reversed at the beginning of 2019, according to Mercer Canada’s pension health index.
The index, which represents the solvency ratio of a hypothetical plan, rose from 102 per cent at the beginning of the year to 106 per cent on March 31.
This can be credited to double-digit equity market returns, said Mercer Canada, noting the gains were partially offset because a 30-basis-point drop in long-term interest rates increased liabilities.
“In the equity markets, the rebound was really driven a lot by a reversal in the sell-off that we experienced at the end of 2018,” says Andrew Whale, principal in Mercer Canada’s financial strategy group.
Looking past equities, the first quarter of 2019 saw a significant decrease in bond yields at the long end, which is where DB plans tend to invest their fixed income, says Whale. “It is how their liabilities are valued, so the liabilities went up as a result.”
Despite this rebound in Q1, volatility has continued and it isn’t likely going away any time soon, especially given some of the geopolitical events on the horizon, such as elections in Canada, trade negotiations, Brexit and more, he adds. With uncertainty comes volatility and, for this reason, Whale encourages DB plans — especially those that are closed or frozen — to evaluate their risk strategies and potentially take risk off the table with more fixed income liability-matching or an annuity purchase.
“Q1 was definitely a recovery to some extent, but the end of Q1 did close with a pretty steep drop in long-term interest rates,” he says. “So I think it improved the position, but I think no one should be sitting still right now.”