Canadian DB pensions should de-risk in 2022, experts say

Canadian defined-benefit (DB) pension plans finished 2021 on a high note, with most showing positive investment returns and surplus positions.

The latest median solvency ratio of the DB plans within Mercer Canada’s database was 103% as of Dec. 31, up by two percentage points from Sept. 30 and by seven percentage points at the beginning of 2021.

According to Mercer, 61% of the plans in the firm’s database at the end of Q4 are estimated to be in surplus on a solvency basis, compared to 53% at the end of Q3. Of the remaining plans, most have solvency ratios between 90% and 100%.

With most pension plans in a strong financial position to start the year, they will be “in a good position to brace for the significant headwinds that may be on the horizon,” Mercer said, citing the surging Omicron variant and inflation pressures as examples.

Aon plc also found improved funding ratios among Canadian firms.

Aon tracks the aggregate funded ratio for companies in the S&P/TSX composite index with DB plans, and found the ratio increased to 97.2% from 89.4% over the past 12 months. Pension assets returned 7% in 2021 and ended the year up 4.8% in the fourth quarter.

According to Mercer, a typical balanced pension portfolio would have returned 5.6% during the fourth quarter of 2021.

“We continue to believe, given the improved positions of many DB plans, that plan sponsors should be revisiting their risk exposures, and where it makes sense locking in some of these gains,” said Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary, in a release. “Plan sponsors will not want to see their surplus positions turn into deficits due to their inaction.”

Ukonga added that “well-funded closed and frozen plans may have little reward for continuing to take market risk,” saying that plan sponsors could increase allocations to defensive assets.

Nathan LaPierre, partner, Wealth Solutions, with Aon, agreed. “Plan sponsors are likely to use the significantly improved funded positions to undertake de-risking activities and protect those funded positions in 2022,” LaPierre said in a release.

Open plans and those with longer time horizons need to remain in growth assets, however. To manage associated volatility, Ukonga suggested that plan sponsors could increase diversification of their public market investments, increase allocations to private markets and include risk-sharing features in their plan design.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.