The funded position of a typical Canadian defined benefit pension plan fell slightly on a solvency basis and rose on an accounting basis in February, according to a new report by Telus Health.

During the month, the solvency of the average DB pension plan dipped by 0.7 per cent, falling to 101.3 per cent. 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, rose 0.7 per cent to 99.6 per cent. Since the indexes — a continuation of the long-running pension indices produced by LifeWorks Inc. — are reset to 100 per cent at the beginning of each year, this indicates an average plan’s solvency ratio’s improved by 1.3 per cent and its balance sheet’s declined by 0.4 per cent since the beginning of the year.

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Investment returns were negative during the month. The most significant losses stemmed from allocations to Canadian equities, with the S&P/TSX composite index dipping 2.5 per cent. Global equities, as measured by the MSCI ACWI, declined by 0.9 per cent.

Returns for Canadian bond indices were also negative as yields increased across durations. Short-term Government of Canada bond yields increased by 0.45 per cent during the month and long-term yields increased by 0.22 per cent. During the month, market expectations for long-term inflation — the break-even inflation rate — also rose by 0.06 per cent to 1.90 per cent.

The poor performance of Canadian equities and fixed income may relate to a divergence in the interest rate policies and inflationary pressures faced in Canada and the U.S., noted the report. “Any divergence will add to uncertainty in a number of areas, including currency movements,” said Julianna Spiropoulos, partner and head of investment strategy, investment and risk at Telus Health, in a press release.

The report also concluded there are widespread expectations that interest rates will be cut more quickly than either the Bank of Canada or the U.S. Federal Reserve Bank have indicated. “We still have significantly inverted yield curves,” said Spiropoulos. “Equity markets appear to be pricing in an expectation that there will be enough of a slowdown in the economy and inflation to allow central banks to reverse some of the recent interest rate rise.”

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