Positive foreign market returns in the second quarter (Q2) helped bolster the solvency positions of defined-benefit (DB) pension plans in Canada, according to Mercer Canada’s latest pension health index.
The firm reports that the solvency ratio of a hypothetical DB pension plan ticked up to 103% on June 27 from 102% at the start of the year. It also says that the median solvency ratio of its clients’ DB pension plans is unchanged from the beginning of the year, at 93%. Still, over the past year, most pension plans are now about 10% to 15% better funded, Mercer reports.
“Pension plans were boosted in the second quarter by strong foreign equity market performance,” the firm’s report says. However, it notes that this gain in foreign equities was largely offset by weakness in Canadian equities and the impact of a 20-basis point drop in long-term interest rates, which increased pension liabilities by 2% to 3% over Q2.
“Despite yet another decline in long-term interest rates, most DB pension plans remain in strong financial shape,” says Manuel Monteiro, leader of Mercer Canada’s Financial Strategy Group, in a statement. “However, those plans with large allocations to Canadian equities and lower hedges against interest rate movements will have experienced some deterioration in the second quarter”.
Mercer reports that a typical balanced pension portfolio would have returned 3.6% during Q2 amid positive returns from Canadian bonds and foreign-equity markets.
The firm also notes that the Ontario government announced significant changes to pension funding rules in Q2, which should cause pension plan sponsors to revisit their risk management strategy, amid strong solvency, the changes to the funding rules, and the risk of an equity market correction.
“We expect that the new funding rules could spur some plan sponsors to revisit previous decisions to de-risk their pension plans,” Monteiro notes. “However, sponsors of plans that have been closed or frozen will likely continue down the path of reducing their risk exposure by moving away from equities into bonds and by entering into annuity transactions.”
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