The median solvency ratio of Canadian defined benefit plans in the pension database of consulting firm Mercer improved in the third quarter of 2023.
Specifically, the Mercer Pension Health Pulse, a measure that tracks the median solvency ratio of these plans, increased to 125% as of Sept. 30, up from 119% as of June 30, said an Oct. 2 release.
As the beginning of the year, the figure was at 113%.
Mercer said in the release that the improvement occurred despite the fact that most pension fund asset returns were negative in the third quarter. However, as bond yields increased in the quarter, DB liabilities decreased. This reduction, along with a decline in the estimated cost of purchasing annuities, more than offset the effect of negative asset returns, resulting in stronger overall funded positions, Mercer explained in the release.
The Mercer database comprises almost 500 pension plans across Canada.
Of all the plans in Mercer's pension database, as of the end of the third quarter, 88% were estimated to be in a surplus position on a solvency basis, compared with 85% at the end of the second quarter.
"2023 so far has been good for DB pension plans' financial positions," said Ben Ukonga, principal and leader of Mercer's wealth practice in Calgary. "However, as we enter the fourth quarter, will the good news continue to the end of the year?"
Mercer cited such global macroeconomic concerns as a possible recession, high inflation and geopolitical tensions.
"Looking ahead, with interest rates expected to remain high in the short to medium term, plan sponsors should be reviewing their risk tolerances, the risks they are exposed too, and taking steps to hedge or transfer the risks they do not want," added Ukonga. "Or else, they will be kicking themselves when the Goldilocks environment DB plans are experiencing comes to an end."
