Canadian defined benefit plans' solvency ratio dips in Q4 – Mercer

The median solvency ratio of Canadian defined benefit plans in the pension database of consulting firm Mercer weakened in the fourth quarter of 2023, but was up over the previous year.

Specifically, the Mercer Pension Health Pulse, a measure that tracks the median solvency ratio of these plans, slipped to 116% as of Dec. 31, down from 125% as of Sept. 30, but up from 113% at the beginning of 2023, said a Jan. 2 release.In the fourth quarter, Mercer noted these DB plans delivered positive asset returns, but such returns were not enough to offset the increased DB liabilities of the plans, resulting in an overall faltering of solvency ratios. Mercer also indicated that DB pension plans that used fixed-income leverage may have experienced stable or improved solvency ratios over the quarter.

"It is likely that members of DB pension plans should see improvement in the financial health of their plans," said Jared Mickall, principal and leader of Mercer's wealth practice in Winnipeg, in the release. "2023 saw strong equity performance amidst a volatile interest rate environment. The journey for a DB pension plan is very long, and successful pension plan financial management requires navigation of short-term headwinds in order to meet long-term objectives."

Mercer also noted that while Canadian inflation declined over the course of 2023 and is approaching the upper end of the Bank of Canada's target of 3%, interest rates remain high. Indeed, the BoC's overnight rate is currently at 5%, a 22-year high. Mercer said it's unclear whether the interest rates that apply to DB pension plans will stabilize in 2024, and if so, at what level. Consequently, interest rates continue to pose a "significant risk" for many DB pension plans, Mercer added.

"Members of Canadian DB pension plans and their sponsors will be keen to maintain solvency ratios above 100%," added Mickall. "Canadian DB pension plans should continue to be vigilant in the financial management of their plans through appropriate governance and risk management processes. A consideration in 2024 will be the role of artificial intelligence as part of pension plan risk management."