Reports urges plan sponsors to hedge against interest rate risks
There was a slight decrease in the funding levels of Canada’s defined benefit pension plans in the third quarter.
The Aon Pension Risk Tracker shows that the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index decreased to 106.5% compared to 106.9% at the end of the second quarter.
The tracker analyzes the aggregate funded position of companies in the main Canadian stock index that have DB pension plans and found that pension plan assets gained 5.1% over the third quarter of 2024.
The long-term Government of Canada bond yield decreased 26 basis points relative to the previous quarter rate, and credit spreads narrowed by 3 bps, resulting in a decrease in the discount rate, from 4.77% to 4.48%.
“Pension plans have continued to maintain their funded positions over the third quarter,” said Nathan LaPierre, partner, Wealth Solutions, Aon. “However, with inflation having reached the Bank of Canada’s target, and with the prospect of further interest rate reductions, plan sponsors should ensure that their plans are well hedged against interest rate risks.”
Meanwhile, the latest Mercer Pension Health Pulse reveals that the median solvency ratio of the defined benefit pension plans in the firm’s pension database increased from 121% on June 28, 2024, to 122% September 30, 2024.
Despite increased liabilities due to lower interest rates, many pension plans’ assets increased by a greater amount to boost their overall solvency ratio.
“This quarter underscores the volatility Canadian DB pension plans face,” said Jared Mickall, Principal and leader of Mercer’s Wealth practice in Winnipeg. “While strong asset performance is encouraging, the decline in interest rates and subsequent rise in liabilities demonstrates the need for vigilant risk management.”
