Rising bond yields boost pension solvency even as assets drop

As stocks and bonds were pummelled in the second quarter of this year, rising yields boosted the solvency of Canadian defined-benefit (DB) pension plans, a report from Mercer Canada says.

The median solvency ratio among the nearly 50 Canadian pension plans, in Mercer’s database,  increased to 109% in the quarter ended June 30, up from 108% on March 31.

The ratio improved even as inflation soared, with central bankers aggressively raising rates and increasing recession fears. A typical balanced pension portfolio would have dropped 12.1% in Q2, the report said.

However, bond yields across all different durations increased between 80 and 100 basis points in the quarter, Mercer said, bringing year-to-date yield increases to between 160 and 230 basis points.

“Despite the significant negative returns on the asset side of the equation, the steep rise in bond yields has had a very favourable impact on the financial position of most DB plans,” said Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary, in a release.

The report estimated that almost three-quarters (73%) of plans are in a surplus position on a solvency basis. Another 16% have solvency ratios between 90% and 100%, 5% have ratios between 80% and 90%, and 6% of plans have solvency ratios below 80%.

While most plans appear to be on a sure footing now, the report warned of considerable risks ahead.

“However, with the increased risk of a recession, continuing conflict in Ukraine, historic high levels of inflation, and the volatility of the financial markets, DB plans’ funded positions can be expected to remain extremely volatile,” Ukonga said.

Staff

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