DB pension plans improve in second quarter

The health of Canadian defined benefit pension plans continued to improve in the second quarter of 2023, according to consulting firm Mercer.

The company said the median solvency ratio of defined benefit plans in its database ticked upward to 119% at the end of June, meaning more than half had a surplus of funds.

That’s despite the U.S. debt ceiling scare and the lingering effects of the banking crises south of the border, Mercer said.

Pension funds’ investment returns were mostly positive in the second quarter, it said, and increases in bond yields helped reduce plan liabilities.

The company estimated that 85% of the plans in its database were in a surplus position at the end of the second quarter, up from 83% in the previous quarter.

“The question that should now be on plan sponsors’ minds is how best to manage this surplus, and potentially locking it in, in order not to re-experience the dark days of significant pension deficits,” said Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary, in a press release Tuesday.

On the other end of the spectrum, 4% of the plans are estimated to have solvency ratios less than 80%, a figure that didn’t change from the previous quarter, Mercer said.

Market conditions have been favourable to defined benefit plans, Mercer said, but risks remain with inflation still above central banks’ target ranges.

Central banks have been hiking interest rates to try and quell inflation, with the Bank of Canada emerging from a months-long pause to raise its key policy rate in June.

The company said plan sponsors dealing with a surplus should be looking at how best to protect it should a recession occur. It said sponsors should review their risk appetite and exposures and make any necessary adjustments.

“Despite the improved financial positions of most DB plans, DB plans sponsors need to remain vigilant given the level of uncertainty that still exists,” said Ukonga.

According to Statistics Canada, in 2020, more than 4.4 million Canadians were covered by a defined benefit pension plan.

The agency said these types of plans have become less and less common in the last few decades, as employers have been switching to defined contribution plans.

Aon PLC reported Tuesday that the funded ratio for defined-benefit pension plans at firms that belong to the S&P/TSX Composite index edged up to 102.1% from 101.8% in the second quarter, and pension assets gained 1.2%.

The long-term Government of Canada bond yield increased 7 basis points (bps) during the quarter and credit spreads widened by 4 bps. The combination resulted in an increase in the interest rates used to value pension liabilities to 4.71% from 4.60%, Aon said in a release.

“The muted asset performance and the small increase in discount rates supported a small increase in funded status over the quarter amidst volatility,” said Nathan LaPierre, partner, wealth solutions with Aon, in the release. “Pension plans treaded water at healthy funded positions over the last quarter, giving plan sponsors time to consider de-risking activities and shape better decisions.”