The median solvency ratio of Canadian defined benefit pension plans declined in the fourth quarter of 2023, according to reports by Mercer and Aon.

Mercer’s report, which tracked more than 450 DB pension plans, found the median solvency ratio declined to 116 per cent as at Dec. 31, 2023, from its previous high of 125 per cent in the third quarter. Across the full year, more plans reported solvency ratios above 120 per cent compared to the beginning of 2023 (40 per cent compared to roughly 32 per cent, respectively).

While plans reported positive asset returns, they weren’t enough to offset increased DB liabilities, which resulted in an overall weakening of solvency ratios, said the report, noting DB pension plans that used fixed income leverage may have experienced stable or improved solvency ratios over the quarter.

Read: Median solvency ratio of Canadian DB pension plans up in Q3: reports

“It is likely that members of DB pension plans should see improvement in the financial health of their plans,” said Jared Mickall, principal and leader of Mercer’s wealth practice in Winnipeg, in a press release. “[Last year] saw strong equity performance amidst a volatile interest rate environment. The journey for a DB pension plan is very long and successful pension plan financial management requires navigation of short-term headwinds in order to meet long-term objectives.”

Meanwhile, Aon’s pension tracker found the aggregate funded ratio for Canadian DB pension plans in the S&P/TSX composite index decreased from 105.6 per cent at the end of Q3 2023 to 101.8 by the end of December.

It also noted the funded ratio increased slightly from 100.7 per cent over the course of 2023, with pension assets gaining 12.4 per cent. The long-term Government of Canada bond yield decreased 26 basis points relative to the last year-end rate and credit spreads narrowed by eight basis points, resulting in a decrease in the interest rates used to value pension liabilities from 4.84 per cent to 4.5
per cent. Asset returns from growth assets such as equities and alternatives offset the increase
in pension liability caused by decreasing interest rates.

“The past year was volatile for pension plans,” said Nathan LaPierre, a partner in Aon’s wealth solutions practice, in a press release. “However, most pension plans in Canada will still end 2023 in good shape. Plan sponsors can continue to plan de-risking activities including annuity purchases and hibernation strategies such as liability-driven investing and smart use of diversified growth assets.”

Read: Majority of Canadian DB pension solvency ratios above 100 per cent: report