The solvency position of Canadian pension plans continued to march upwards in last month. The Mercer Pension Health Index stood at 91% on May 31, up from 82 % at the start of 2013.
Pension plans are getting a boost from three key sources — buoyant equity markets, rising long-term interest rates, and plan sponsors making contributions to fund the deficits,” said Manuel Monteiro, partner in Mercer’s Financial Strategy Group.
“For many plan sponsors, getting back to a fully funded status is now clearly in sight.”
Pension plan assets have benefitted from very strong foreign equity returns in 2013 — at the end of May, the S&P 500 and MSCI World indices were up 15.4% and 15.7% respectively (not annualized, in local currencies).
The S&P/TSX Composite index was up a relatively disappointing 3% to the end of May.
At the same time, pension plan liabilities have decreased due to a rise in interest rates — the long-term Government of Canada bond yields used to measure solvency liabilities were about 20 basis points higher at May 31, than they were at the beginning of the year.
“We have witnessed a strong rally in the financial position of pension plans over the last 11 months. However, as we have seen before, the financial position of plans can also deteriorate sharply in short periods of time. If we do see another market reversal, the current upswing will turn out for some plan sponsors to be yet another missed opportunity to take some risk off the table,” noted Monteiro.
“We encourage all plan sponsors to measure their pension risk exposure, and if they feel too exposed to risk, to map out a comprehensive strategy to reduce risk. The strategy could include a combination of adjustments to plan design, investment strategy, funding strategy and/or risk transfers.”