The average discount rate used by Canadian defined benefit pension plans at the end of 2021 was 0.5 per cent higher than the previous year, according to an annual report from LifeWorks Inc.
Drawing from figures submitted by 83 Canadian public DB plans, the report found the average plan used a three per cent discount rate to measure going-concern liabilities at the end of 2021, up from 2.5 per cent in 2020.
The discount rate refers to the interest rate used to predict future cash flow values based on current ones. In total, about 95 per cent of Canadian DB plans raised their rates and about 82 per cent reported using a discount rate within 0.25 per cent of the median figure.
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The 2.5 per cent figure recorded in 2020 was the lowest in the past decade. Its highest point occurred in 2013, when the average discount rate hit 4.75 per cent.
According to the report, the rise in the median discount rate is likely to have a positive effect on DB pension plan health. “If maintained to the end of the year, the significant increases in discount rates will lead to significant decreases in employer service costs and therefore overall pension expense for 2023,” it noted.
Shifts in the median discount rate tend to be reflective of the interest rates set out by the Bank of Canada. During the year, the bank’s average 10-year rate rose from 1.10 per cent to 1.66 per cent. As a result, LifeWorks expects a higher increase will be seen in next year’s survey. Since the beginning of 2022, the 10-year maturities rate climbed from 1.1 per cent to 2.82 per cent.
“The significant rise of bond yields since the end of 2021 may present opportunities for plans to invest in fixed income, as well as to implement certain de-risking activities.”