The financial health of public and corporate defined benefit pension plans in Canada improved in the first quarter of 2023 despite continued market volatility, according to a Monday release from consulting firm Mercer.
Specifically, the median solvency ratio, as measured by the Mercer Pension Health Pulse, of the 463 defined benefit pension plans in Canada in Mercer's pension database climbed to 116% at the end of the first quarter, from 113% at the end of the fourth quarter of 2022.
Mercer said the ratio improved in January and February, with January's performance primarily driven by asset returns, while February's improvement was primarily driven by increasing bond yields. However, these gains in the first two months of year were partly reversed in March, which saw a decline in the ratio primarily due to decreasing bond yields.
Mercer attributed the decline to the "negative market sentiment caused by bank failures and concerns that these could lead to wider financial market contagion."
Moreover, of the plans in Mercer's pension database, 83% were estimated to be in a surplus position on a solvency basis at the end of the first quarter, compared with 79% at the end of the fourth quarter of 2022.
While markets continue to be affected by the volatility that was exacerbated by the banking crisis in the U.S. and Europe, the financial health of most DB plans continues to improve, Ben Ukonga, principal and leader of Mercer's Wealth business in Calgary, said in the release. Many plans are in better health than they have been in 20-plus years, he added.
Looking at the remainder of 2023, Mercer noted that DB plan sponsors will need to prepare for "continued financial market volatility, along with the resulting effect on the financial positions of their plans." Many such plans will not be facing deficit contribution requirements, due to the improvements in financial positions in 2022, and many plans are in surplus positions, Mercer added.
However, to maintain these surplus positions, and not fall into deficits, plan sponsors will "need to ensure they have the appropriate investment and risk management strategies in place, along with robust governance programs," the firm said.