Pension plan finances healthier in Q1

Defined benefit pensions enjoyed improving solvency metrics in the first quarter, despite elevated market volatility and tightening financial conditions, according to new data from consulting firm Mercer.

The median solvency ratio for the DB plans in Mercer’s universe rose to 116% in the quarter, up from 113% at the end of 2022.

Other measures of pension funding health also indicated improvement in the first quarter, with 83% of plans estimated to be in a surplus, up from 79% at the start of the quarter.

At the same time, the proportion of plans estimated to have solvency ratios of between 90% and 100% declined to 9% from 12% in the previous quarter. And the share of plans with a solvency ratio of under 80% also dipped from 5% to 4% during the period.

“The first quarter saw improvements in January and February, with January’s improvement primarily driven by asset returns, while February’s improvement was primarily driven by increasing bond yields,” the firm reported. A basic balanced portfolio delivered a 4.6% return for the first quarter, it said.

However, the gains in early 2023 were partially reversed in March, the firm noted, as bond yields declined, “which can be attributed to the negative market sentiment caused by bank failures and concerns that these could lead to wider financial market contagion,” Mercer said.

Looking ahead, Mercer said that DB plan sponsors should be prepared to face continued market volatility this year.

“In order to be able to navigate the volatility, appropriate risk management programs need to be in place,” said Ben Ukonga, principal and leader of Mercer’s wealth business, in a release.

“We are entering a stage when traditional lenders will be reviewing their balance sheets and may reduce their lending activity,” said Venelina Arduini, principal at Mercer Canada. “Private market investors should expect increased capital call activity across all asset classes and review their fund sourcing and governance processes to meet such calls.”

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