The financial health of defined benefit plans in Canada improved slightly in the third quarter, as strong asset performance outweighed the impact of declining interest rates, according to the Mercer Pension Health Pulse, a measure that tracks the median solvency ratio of the pension plans in Mercer’s database.
The pension plans’ overall funding positions edged up to 122% as of Sept. 30 from 121% as of June 28, said the MPHP, which was released Oct. 1.
In addition, DB plans that used fixed-income leverage might have experienced stable or improved solvency ratios over the third quarter, the MPHP noted.
The MPHP also found that the number of plans with solvency ratios above 100% at the end of the third quarter increased from the end of the second quarter.
While the overall financial position of Canadian pension plans improved over the third quarter, stakeholders should still monitor the movement of long-term interest rates on Canadian bonds while keeping inflation in sight, the MPHP said.
“This quarter underscores the volatility Canadian DB pension plans face,” said Jared Mickall, principal and leader of Mercer’s wealth practice in Winnipeg, in the MPHP. “While strong asset performance is encouraging, the decline in interest rates and subsequent rise in liabilities demonstrates the need for vigilant risk management.”
While the Bank of Canada recently enacted two rate cuts in the third quarter — on July 24, the BOC cut the overnight rate to 4.5% from 4.75% and on Sept. 4, it again reduced the overnight rate to 4.25% — these measures had a less significant impact on pension plan liabilities than positive market gains, the MPHP added.
The Mercer database contains information on about 450 pension plans across Canada, in the public, private and not-for-profit sectors.
