Defined-benefit (DB) pension plans in Canada experienced volatility throughout the second quarter of 2024 due to interest rate changes and market instability, according to Mercer Canada.
The DB plans tracked in Mercer’s database had an average solvency ratio of 118% on March 29, 123% on April 30, 122% on May 31 and 118% on June 28. The solvency ratio is the ratio of plan assets to liabilities.
“The overall financial health of DB pension plans in Canada remains strong,” said Jared Mickall, principal and leader of Mercer’s Wealth practice in Winnipeg, in a release.
“However, the interest [rate] changes and market volatility during this quarter is a good reminder that a DB plan’s funded position can change quickly and plan sponsors should plan accordingly.”
Most plans saw positive returns from fixed-income assets, U.S. equities and international equities, which were generally offset by negative returns from Canadian equities and increased DB liabilities, the report noted.
As a result, solvency ratios remained mostly stable. Plans with fixed-income leverage, however, may have experienced stable or improved solvency ratios.
An April report from the Canadian Institute of Actuaries found Canadians’ life expectancy is expected to improve. That means lifetime pensions may need to be paid for longer, which Mercer said could amount to DB liabilities increasing by 2%–4%.
“Canadian DB pension plans have long been talking about longevity risk, and what it means for the funding of their plans,” Mickall said. “It’s incumbent on DB pension plans to examine their funded positions, conduct a strategic review of the risks their plans face, and take action.”
The report also noted that the number of plans with solvency ratios above 100% at the end of the second quarter was generally consistent with what was observed at the end of the first quarter.