The median solvency ratio of Canadian defined benefit pension plans increased to 122 per cent in the third quarter of 2024, up slightly from 121 per cent in the previous quarter, according to a new report by Mercer.
The report, which tracked 450 DB pension plans, attributed this increase to declines in global interest rates, according to a press release.
Read: Median solvency ratio of Canadian DB pension plans stays flat in Q2 2024: reports
“This quarter underscores the volatility Canadian DB pension plans face,” said Jared Mickall, principal and leader of Mercer’s wealth practice, in the release. “While strong asset performance is encouraging, the decline in interest rates and subsequent rise in liabilities demonstrates the need for vigilant risk management.”
The report noted global equities and fixed income posted positive returns during the quarter, driven by major central banks implementing rate cuts in response to slowing inflation and economic weakness.
While volatility spiked in August as weaker than expected data readings led to recessionary fears in the U.S. and a global unwinding of carry trades in the Japanese yen, the report noted market volatility remains high as the U.S. presidential election on Nov. 5, 2024, draws closer.
Read: Median solvency ratio of Canadian DB pension plans up 2% in Q1 2024: reports
A separate report by Aon found the aggregate funded ratio for Canadian DB plans in the S&P/TSX composite index decreased to 106.5 per cent, down from 106.9 per cent at the end of the second quarter.
It noted the long-term Government of Canada bond yield decreased 26 basis points relative to the previous quarter rate and credit spreads narrowed by 3 bps, leading to a decrease in the discount rate from 4.77 per cent to 4.48 per cent. Meanwhile, pension assets gained 5.1 per cent during the quarter.
“Pension plans have continued to maintain their funded positions over the third quarter,” said Nathan LaPierre, a partner in Aon’s wealth solutions practice, in a press release. “However, with inflation having reached the Bank of Canada’s target, and with the prospect of further interest rate reductions, plan sponsors should ensure that their plans are well hedged against interest rate risks.”
Read: Median solvency ratio of Canadian DB pension plans declines in Q4 2023: reports