Pension liabilities increased more than assets amid changing conditions
Canada’s defined benefit pension plans remain strong, but their health has suffered a slight dip in the third quarter of 2022.
An analysis by Aon shows that the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index decreased from 100.5% to 97.2% during the past three months.
However, at the start of the year the Aon Pension Risk Tracker was at 96.9%.
There was a slight decrease in pension assets, down 0.1% over the third quarter.
Meanwhile, the decline in the Canadian government’s long-term bond yield (by 5 basis points) resulted a lower interest rate used to calculate the value of pension assets (from 4.83% to 4.62%).
With most pension funds exposed to interest rate risk, pension liabilities rose by more than assets due to the decreased discount rate.
“The small reduction in discount rates, coupled with poor return-seeking asset performance over the quarter, reversed some of the increase in funded positions over the previous two quarters,” said Nathan LaPierre, partner, Wealth Solutions, Aon, noting that funded positions are slightly better than at the beginning of the year.
De-risking for volatility
With market conditions still uncertain currently, LaPierre advises that pension plan sponsors should take a cautious approach.
“Plan sponsors should carefully consider de-risking activities as they seek to make better decisions that help maintain those funded positions through the significant volatility we’re currently experiencing,” he said.
