Median solvency ratio of Canadian DB pension plans stays flat in Q2 2024: reports

Read: Median solvency ratio of Canadian DB pension plans up 2% in Q1 2024: reports

Most plans saw positive asset returns from fixed income assets, U.S. equities and international equities, which were generally offset by negative asset returns from Canadian equities and increased DB liabilities. Together, these trends resulted in an overall maintenance of solvency ratios, said the report, which noted DB pension plans that used fixed income leverage may have experienced stable or improved solvency ratios.

The volatility seen throughout the quarter was attributed to shifting trends in the industry like changes in Canadian interest rates, ongoing risks from inflation, volatile investment markets and life expectancies of plan members and their spouses getting longer than what may be currently budgeted, the report said.

“The overall financial health of DB pension plans in Canada remains strong,” said Jared Mickall, principal and leader of Mercer’s Wealth practice in Winnipeg, in a press release. “However, the interest changes and market volatility during this quarter is a good reminder that a DB plan’s funded position can change quickly and plan sponsors should plan accordingly.”

Read: Median solvency ratio of Canadian DB pension plans declines in Q4 2023: reports

A separate report by Aon found the aggregate funded ratio for Canadian DB pension plans in the S&P/TSX composite index remained unchanged at 105.3 per cent at the end of June, compared to the end of the previous quarter.

Pension assets gained 1.5 per cent as at June 28, 2024, said the report. Long-term Government of Canada bond yields increased five basis points relative to the previous quarter rate and credit spreads narrowed by four basis points, resulting in a marginal increase in the interest rates used to value pension liabilities from 4.65 per cent to 4.66 per cent.

“The second quarter of 2024 saw pension plans maintain their healthy funded positions,” said Nathan LaPierre, a partner in Aon’s wealth solutions practice, in a press release. “Markets have continued to provide time for plan sponsors to take action and de-risk in light of their funded positions.”

Read: Average Canadian DB pension plan’s funded position on solvency, accounting basis up in April: report

Meanwhile, Telus Health’s latest pension index found the funded position of a typical pension plan increased on a solvency basis from 106. 4 per cent in April to 108.9 per cent in May. However, on an accounting basis, the funded position decreased to 107.3 per cent in May from 108 per cent in April.

It found a representative pension plan portfolio returned 2.7 per cent in May, mainly due to positive returns from the equity and bond markets. The MSCI ACWI returned 3.3 per cent in Canadian dollar terms, while the Canadian equity index and the S&P/TSX Composite finished the month with a return of 2.8 per cent.

Short-term Government of Canada bond yields decreased by roughly 0.17 per cent and long-term Government of Canada bond yields decreased by nearly 0.21 per cent. Credit spreads for corporate bonds didn’t change materially during May.

“Pension plan sponsors should carefully consider whether they want to retain material levels of interest rate risk in their plan, or whether they should pivot to protect themselves against unexpected interest rate movements going forward,” said Murray Wright, associate partner on Telus Health’s consulting team, in a press release. “With the average funded status of pension plans continuing to show strength, plan sponsors contemplating a risk reduction strategy may find the current market conditions opportune.”

Read: Average Canadian DB pension plan’s funded solvency position up 2.8% in February: report