Q2 results showed some surprising results amidst all the economic and market uncertainty
There’s some good news for defined pension plans these days, despite all the current economic uncertainty and slide in the equities market.
“Despite the decline in the market, the financial position of most defined benefit (DB) pension funds has improved,” Ben Ukonga, principal and leader of Mercer’s Wealth Business in Calgary told Wealth Professional, sharing the results for the Mercer Pension Health Pulse for the second quarter of 2022.
“That’s because pension liabilities are measured with bond yields and increases in bond yields lead to reduction in pension liabilities. So, it’s actually unlike everything else that’s happening in the market and a little bit more of a good news picture.”
Ukonga said the liability value has also declined, leading to a slight improvement for most DB plans.
The report noted that the median solvency ratio of the DB pensions plans in Mercer’s pension database increased to 109% at the end of June from 108% at the end of March. Of all the plans it had at the end of Q2, 73% were in a surplus position and only 6% had solvency ratios less than 80%.
The number of people with defined benefits plans has been declining for at least 20 years, and is more prevalent in the public sector and larger corporations, so Ukonga said advisors should be aware of whether their clients have one. He added that with all the ongoing uncertainty, plan administrators and sponsors should also take note of what’s happening.
“They should ensure that their plans have appropriate risk systems in place so that, when bad things happen, they have systems in place to deal with that so they’re not making rash decisions in the heat of the moment,” he said.
The current picture is also good for the plan sponsors because the improved financial positions means the plans will need less contributions, so the businesses may have excess cash to invest in their businesses. There won’t be more pressure from additional contributions being needed for the pension plans, which is good news if they’re struggling with other things going on right now.”
But, overall, he said, “because bond yields are going up, interest rates are going up. If the market continues to go down and interest rates stop increasing, the story may be very different for DB plans,” said Ukonga, noting DB plans differ from defined contributions plans because they have both assets and liabilities, which are being impacted in this volatile time.
