A rally on the stock market in the fourth quarter helped boost the strength of Canadian defined benefit pension plans to end the year, a report by Mercer Canada said Monday.
The consulting firm said its pension health index, which represents the solvency ratio of a hypothetical defined benefit pension plan, rose to 114 per cent at the end of December from 107 per cent at the end of September.
In the fourth quarter, funded positions of defined benefit plans continued to recoup the losses incurred in the first quarter — helped by the rally in equity markets, aided by higher bond yields and changes to the Canadian Institute of Actuaries’ commuted value standards, Mercer said.
Ben Ukonga, principal in Mercer’s financial strategy group, said the funded positions of defined benefit plans endured a gut-wrenching decline in the first quarter, but most are now back at or close to their pre-pandemic level.
The median solvency ratio of the pension plans of Mercer clients was at 96 per cent at Dec. 31, up from 93 per cent on Sept. 30, but down from 98 per cent at the beginning of the year.
A solvency ratio of 100 or more indicates a plan is fully funded while anything less indicates there would be some shortfall if a plan had to be wound up.
A separate report by Aon plc on Monday also concluded that financial health improved in 2020 for Canadian defined benefit pension plans.
That report said pension assets had a 9.9 per cent return over 2020 and ended the fourth quarter up 3.9 per cent. Though pension plans ended the year in a similar — or slightly better — spot than a year ago, 2020 was a “wild ride,” said Nathan LaPierre, a partner of retirement solutions at Aon, in the report.
“Equity markets performed strongly in 2020 and helped funded ratios improve,” Erwan Pirou, Aon’s Canada chief investment officer of retirement solutions, said in a statement.
“However, some pension plans did not realize the full benefit of the equity market rally, as some active equity managers underperformed their benchmark.”
As long-term Government of Canada bond yields dropped compared with the end of last year, Aon found the increase in pension liability caused by decreasing interest rates offset the positive effect of asset returns on the funded status of the plan.
Given a majority of the plans in Canada are still exposed to interest rate risk, LaPierre said that those with ongoing defined benefit plans “will need to grapple with lower return expectations stemming from ultra-low interest rates.”