Mercer and Aon reports show pension funds improved their ability to meet liabilities during the first quarter of 2023
Canada’s defined benefit (DB) pension funds expertly rode the wave of market volatility in the first quarter according to two new reports.
Both Mercer and Aon have published reports this week showing improvement for the organizations millions of Canadians are relying on to provide their retirement incomes.
The Mercer Pension Health Pulse (MPHP) tracks the median solvency ratio of funds in its pension database and increased from 113% at the start of 2023 to 116% at the end of the first quarter.
Asset returns in January and bond yields in February were the main drivers of the improvement, although March took the edge off the positive quarter as banking sector sentiment impacted bond yields.
A larger share of funds showed a surplus on a solvency basis (83% vs 79% at the start of the year) with almost one in ten at 90-100%.
Best for 20+ years
“While markets continue to be affected by the volatility that was exacerbated by the banking crisis in the US and Europe, the financial health of most DB plans continue to improve” said Ben Ukonga, Principal and leader of Mercer’s Wealth business in Calgary. “With many plans being in better health than they have been in 20+ years”.
Mercer says that funds must remain vigilant to market volatility and risks including the ongoing war in Ukraine.
There may also be unintended consequences for plans from Bill C-228, which is designed to provide pension deficits with super priority ahead of secured and unsecured creditors in the case of a plan sponsor bankruptcy or arrangement with creditors.
Higher borrowing costs and stricter lending covenants may make it hard for insolvent plans to raise funds and may lead to the closure of some, Mercer says.
Equity gain
The Aon Pension Risk Tracker also gained in the first quarter, rising from 100.7% to 101.1%.
It calculates the aggregate funded position on an accounting basis for companies in the S&P/TSX Composite Index with DB plans.
The report shows that pension assets gained 5.1% over the first quarter of 2023.
Meanwhile, the long-term Canadian government bond yield decreased 26 basis points during the quarter and credit spreads widened by two bps.
The impact of this combination was a decrease in the interest rates used to value pension liabilities from 4.84% to 4.60% with the increase in pension liability caused by decreasing interest rates partially offsetting the positive effect of asset returns on the funded status of the plans.
“The recent issues in the banking system had surprisingly little bearing on overall equity return in the first quarter, as equity markets continued their recovery after a strong Q4. This was enough to have a small positive impact on funded ratios and more than offset the small negative effect of a decrease in interest rates,” said Erwan Pirou, Canada chief investment officer at Aon. “Many pension plans are looking at ways to protect the current good financial position with de-risking or hibernation strategies as well as pension risk transfer activities.”
