The funded position of a typical defined benefit pension plan decreased on a solvency basis but increased on an accounting basis in January, according to LifeWorks Inc.’s latest monthly report.

During the first month of the year, the solvency index, which provides an indication of changes in the solvency funding level of the average pension plan, dipped to 98.3 per cent from 100 per cent. The accountancy (balance sheet) index, which provides an indication of changes in the accounting funding level of an average pension plan, rose to 101.6 per cent from 100 per cent.

Read: Canadian DB pensions’ average funding positions improved slightly in December: report

During the month, investment returns were negative, with the typical DB plan seeing its assets decrease in value by 3.6 per cent. According to LifeWorks, the dip can be attributed to plan sponsors’ concerns about inflation and the risk to supply chains posed by the ongoing conflict between Russia and Ukraine.

According to Véronique Lauzière, associate partner of investment and risk and innovation leader at LifeWorks, the severity of the impact of the ongoing crisis on the Russian-Ukrainian border on equity prices is an indication that investors are uncertain about how the situation will play out in the coming months.

“Some may argue the volatility is about the possible escalation of the conflict. To some extent, this [risk] is reflected in the market. If the conflict escalates, its impact on investor sentiment will become more severe.”

Read: Canadian DB plan solvency, balance sheets dipped in November: report

Among institutional investors, there are fears that higher inflation will become persistent. Following the release of the report, the U.S. Bureau of Labor Statistics revealed year-over-year inflation reached 7.5 per cent in January.

In December, Canada’s year-over-year inflation rate hit 4.8 per cent, steeper than at any point since September 1991, the month following the collapse of the U.S.S.R.

“I believe the reason the Bank of Canada is not responding [to inflation by hiking interest rates] is because there is a theory it is passing and related to shortages in the supply lines. There’s been slowness to respond, but the more we wait, the more inflation will seem persistent,” says Lauzière, noting persistent inflation could have a significant impact on pension plans in the longer term.

“The more it seems persistent, the more people will ask for salary and pension increases. For pension plans, there may be increased pressure to index certain non-indexed benefits.”

Read: Median return of Canadian DB pension plans reaches 4.11% in Q4 of 2021: report