Key Takeaways
- • Mercer's Pension Health Pulse shows the median solvency ratio of Canadian defined benefit (DB) plans at 118 percent as of March 29, 2024, up from 116 percent at December 31, 2023.
- • Mercer's Jared Mickall, Winnipeg wealth practice leader and pension consultant, urges plan sponsors not to become complacent despite improved funding positions.
- • Rising long-term Canadian bond yields lowered liabilities in the first quarter even though the Bank of Canada held its overnight rate at five percent.
- • Plan sponsors with surplus should weigh options including contribution holidays, improved benefits, or retaining the surplus, while reviewing risk retention and transfer such as annuity purchases.
- • Canadian DB plans should revisit risk management frameworks ahead of forthcoming risk management guidelines from the Canadian Association of Pension Supervisory Authorities (CAPSA).
Summary
Mercer reports that more defined benefit pension plans in Canada now show solvency ratios above 100 percent than at the start of the year, according to its Pension Health Pulse (MPHP), which tracks the median solvency ratio of DB plans in Mercer's pension database. The median solvency ratio stood at 118 percent as of March 29, 2024, compared with 116 percent at December 31, 2023. Jared Mickall, Mercer's Winnipeg wealth practice leader, pension consultant and actuary, said the improvement justifies a review of risk management profiles, and he recommended that plan sponsors "don't become complacent."
According to Mercer, most plans saw positive asset returns and decreased DB liabilities during the first quarter, with strong equity performance and rising interest rates driving the improvement. Plans that used fixed income leverage may have seen stable or improved solvency ratios. Canadian inflation eased to 2.9 percent in January, and the Bank of Canada kept its overnight rate at five percent on March 6, continuing quantitative tightening. February inflation of 2.8 percent, reported on March 19, prompted industry speculation about the timing of a rate cut. Although the overnight rate was unchanged, longer-term Canadian bond yields finished the quarter higher than at the start of the year. Because plans discount liabilities using bond yields at five, seven, and 15 years or longer, those higher yields reduced liabilities.
For plans with surplus, Mercer says an effective strategy should be developed, with contribution holidays, improved benefits, or retained surplus as typical options whose financial impacts should be assessed. Mercer also advises that a review of risks to be retained or transferred, such as an annuity purchase, remains prudent given the risk of declining Canadian interest rates and market volatility. Mickall noted that a tailored investment strategy can be a viable alternative to annuitization and, in some cases, the only feasible one. Mercer expects the forthcoming CAPSA guidelines to prompt plan sponsors and administrators to revisit their policies. Mickall cited interest rate changes, market volatility, increasing longevity and plan maturity as key risks requiring sound governance and risk management.
According to Mercer, most plans saw positive asset returns and decreased DB liabilities during the first quarter, with strong equity performance and rising interest rates driving the improvement. Plans that used fixed income leverage may have seen stable or improved solvency ratios. Canadian inflation eased to 2.9 percent in January, and the Bank of Canada kept its overnight rate at five percent on March 6, continuing quantitative tightening. February inflation of 2.8 percent, reported on March 19, prompted industry speculation about the timing of a rate cut. Although the overnight rate was unchanged, longer-term Canadian bond yields finished the quarter higher than at the start of the year. Because plans discount liabilities using bond yields at five, seven, and 15 years or longer, those higher yields reduced liabilities.
For plans with surplus, Mercer says an effective strategy should be developed, with contribution holidays, improved benefits, or retained surplus as typical options whose financial impacts should be assessed. Mercer also advises that a review of risks to be retained or transferred, such as an annuity purchase, remains prudent given the risk of declining Canadian interest rates and market volatility. Mickall noted that a tailored investment strategy can be a viable alternative to annuitization and, in some cases, the only feasible one. Mercer expects the forthcoming CAPSA guidelines to prompt plan sponsors and administrators to revisit their policies. Mickall cited interest rate changes, market volatility, increasing longevity and plan maturity as key risks requiring sound governance and risk management.
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