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Pension Funds

Canadian pension plans end 2017 nearly fully funded – reports

Canadian public and corporate defined benefit plans held steady on funding in the fourth quarter, as strong equity returns were able to partially fend off declines in fixed income, according to two reports.

Canadian plans were a median 97% funded as of Dec. 29, according to Mercer (Canada), up 4 percentage points from the end of 2016 but unchanged from three months ago.

Separately, Mercer's pension health index, which tracks the typical Canadian defined benefit plan based on 100% funding as of Jan. 1, 1999, was 106% funded at the end of the fourth quarter, the same as the end of the previous quarter but also 4 percentage points higher than a year earlier, Mercer said in a news release Wednesday.

In a separate report from Aon Hewitt Investment Consulting on Thursday, Canadian plans were a median 99.2% funded as of Dec. 29, vs. 99.3% three months earlier. Also, 46% of Canadian plans were fully funded as of Dec. 29, down from 48% at the end of the third quarter.

Canadian plans returned a cumulative 3.1% in the fourth quarter, up from 0.1% in the previous quarter, Aon Hewitt said in a separate release.

Surging equity markets helped maintain overall funding in the fourth quarter, according to both reports, partially mitigating the effects of long-term interest rates that fell 30 basis points in the quarter.

For the fourth quarter, Mercer said U.S. equity returned 6.6% in U.S.-dollar terms and 6.8% in Canadian-dollar terms. International equities returned 3.7% in local currency and 4.5% on a Canadian-dollar basis, while emerging market equities gained 5.7% in local currency and 7.7% on a Canadian-dollar basis. The higher Canadian-dollar returns were the result of the currency's depreciation against the U.S. dollar, British pound and euro during the quarter.

"Markets and monetary policy got together in 2017 to make Canadian pension plans healthier than we've seen in years," said Ian Struthers, partner and investment consulting practice director at Aon Hewitt. "Rising interest rates have decreased plan liabilities, but also remain low enough to continue to support the bull market in equities."

Manuel Monteiro, partner and head of the financial strategy group at Mercer (Canada), said in an interview that new funding rules in Ontario government expected to be put in force later this year will spur plan sponsors to review their overall funding strategy, which could reduce overall median funded status gradually over the next few years. The new rules allow DB plans that are more than 85% funded to calculate their funding on a going-concern, or long-term, basis only, as opposed to also calculating it under solvency rules that required plans to calculate funding on an immediate-termination basis.

The Ontario funding rule changes are expected to force other provinces to adopt similar rules, Mr. Monteiro said. Quebec requires DB plan funding to be calculated exclusively on a going-concern basis regardless of funded status.

"All pension plans should look at their risk management strategy" as a result of the changes, Mr. Monteiro said. "This funding rule change is a game-changer. It could change plan design, change investment strategies and should impact funding strategies."