Despite rising concerns about inflation and the war in Ukraine, the funded position of a typical Canadian defined benefit pension plan improved slightly on both a solvency and accounting basis in February, according to a new report by LifeWorks Inc.
In February, the solvency of the average DB pension plan rose by half a per cent after falling by 1.7 per cent the previous month. The balance sheet index, which is an indication of changes in the accounting funding level of an average plan since the start of the year, was up 0.6 per cent — having also risen 1.6 per cent in January.
The rise wasn’t fuelled by investment returns, which were negative during the month. Losses were led by allocations to global developed market and emerging market equities, which were badly hurt by the invasion of Ukraine. During the month, the MSCI ACWI dropped 2.9 per cent in Canadian dollar terms. Canadian equities performed somewhat better with the S&P/TSX composite index rising by 0.3 per cent. And while Bank of Canada universe bonds remained stable during the month, corporate bond yields increased by 0.18 per cent.
Read: Canadian DB pensions’ average funding positions worsened in January: report
Rather than investment returns, the stronger position of a typical DB pension plan in February stemmed from a drop in overall expenses. The plan expenses index, which provides an indication of changes in the following year’s pension expense since the start of the year, fell by 6.4 per cent last month. The index saw an even more dramatic dip in January, when it fell by 15.5 per cent.
In a press release, Gavin Benjamin, a partner in LifeWorks’ retirement and financial solutions team and an author of the report, said interest rates represented one of the most material risks facing pension plans. “Given the recent increase in bond yields, plan sponsors that want to reduce the interest rate risk in their plans should decide whether to act now or monitor the markets for possible future yield increases. . . . A reduction in interest rate risk can be achieved by increasing the allocation to fixed income investments, lengthening the duration of the current allocation to fixed income — or a combination of the two.”
Read: Canadian DB pensions’ average funding positions improved slightly in December: report