But are there more choppy waters ahead in the fourth quarter?
Canada’s defined benefit pension plans remain in a strong financial position despite negative returns, recession fears, and inflation according to the Mercer Pension Health Pulse.
The median solvency ratio of plans in Mercer’s pension database improved to 125% in the quarter to September 30, 2023, up from 119% in the previous quarter and from 113% at the start of the year. Almost 9 in 10 (88%) of the plans in the database were estimated to be in a surplus position on a solvency basis at the end of the quarter, up from 85% at the end of the second quarter.
The better financial position for DB plans came even as pension fund asset returns were mostly negative in the third quarter, because bond yields increased which decreased plans’ liabilities. There was also a decrease in the estimated cost of purchasing annuities.
However, improvement was lessened for those plans that use leverage in their fixed income assets.
“2023 so far has been good for DB pension plans’ financial positions,” said Ben Ukonga, principal and leader of Mercer’s Wealth practice in Calgary. “However, as we enter the fourth quarter, will the good news continue to the end of the year?”
Fourth quarter challenges?
As we begin the fourth quarter, global conditions remain rocky with inflation still elevated and perhaps rising again, recession potential continuing, and geopolitics concerning.
Labour disputes that could lead to higher wage settlements could add further pressure to inflation in the U.S. and Canada and interest rates may remain higher for longer.
Additionally, markets may well be volatile in the months ahead so pension plans cannot be complacent.
“Looking ahead, with interest rates expected to remain high in the short to medium term, plan sponsors should be reviewing their risk tolerances, the risks they are exposed too, and taking steps to hedge or transfer the risks they do not want,” said Ukonga. “Or else, they will be kicking themselves when the goldilocks environment DB plans are experiencing comes to an end.”
