Canadian defined-benefit (DB) pension plans maintained strong financial positions during the third quarter of 2021 — but it’s possible that won’t last.
The result for the latest Mercer Pension Health Pulse (which tracks the median solvency ratio of the DB pension plans within Mercer’s pension database) was 101% as of Sept. 30, a slight improvement compared with the ratio of 100% at the end of the second quarter.
Equity returns were mostly positive for Q3, but an increase in bond yields led to negative returns on fixed-income investments even while there were lower solvency liabilities, Mercer Canada said in a summary post.
Looking at investment trends, the post noted global equities had positive returns, with the U.S. market leading the pack. Canadian equities lagged in comparison with most other markets, yet “Canadian value stocks reversed course and outperformed growth stocks over the third quarter,” it said.
Another boon for Canadian investors was the depreciation of the loonie. The U.S. dollar strengthened at the same time, but “returns for Canadian investors were strong” in the first half of 2021.
Of the plans in Mercer’s database, just over half (53%) were estimated to be in a surplus on a solvency basis. At the same time, one third (31%) had ratios of between 90% and 100%; 11% had ratios of between 80% and 90%; and 5% had ratios of less than 80%.
“The financial positions of pension plans continue to chug along in 2021, and unless an unexpected event occurs, are on track to ending 2021 in a much better position than they started,” Ben Ukonga, principal in Mercer’s financial strategy group, said in a statement.
However, while a gradually improving global economy is cause for optimism, Mercer noted that potential “headwinds” do exist. Those include inflation, future levels of interest rates, and how markets might react to central banks moves.
The post suggested that while plan sponsors are in strong positions, they should monitor their risk exposures. It may even be time to “lock in some of these [market] gains,” Ukonga said.
“As we all saw in March of 2020, markets can change quickly. Having the right plan and strategy in place is essential to ensure a plan can take advantage of market gains, and be protected from market declines,” said Ukonga.