DB plan solvency in Q1 highest since 2008: Mercer

The financial position of most defined-benefit (DB) pension plans improved in the first quarter despite negative investment returns and volatile markets.

The latest median solvency ratio of the DB plans within Mercer Canada’s database was 108% as of March 31, up by five percentage points from Dec. 31, 2021, and up by four percentage points year over year. That’s the highest funded ratio since 2008.

While investment returns were negative for most of those DB plans in Q1, bond yields increased between 75 and 134 basis points, thereby reducing plan liabilities, Mercer said.

As a result, 75% of the plans in Mercer’s pension database were estimated to be in a surplus position at the end of Q1: “a number not seen in a very long time,” Mercer said. That’s up from 61% at the end of 2021.

However, a typical balanced pension portfolio would have posted a return of –7.1% during Q1, according to Mercer.

Aon plc also found improved pension funding ratios in Q1.

Aon tracks the aggregate funded ratio for companies in the S&P/TSX composite index with DB plans, and found the ratio increased to 100.5% on March 31 from 96.9% on Dec. 31, 2021. That’s up by five percentage points from a year earlier, and just shy of the highest ratio (102.5%, achieved a few times in March 2022) since Dec. 31, 2012, when Aon’s data begins.

“With the ongoing geo-political and economic risks, the need for proper governance and risk management has never been more apparent, although true governance and risk management practices and structures should be in place before the external shock occurs,” said Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary, in a release. “Nevertheless, for plan sponsors with inadequate governance and risk management structures in place, now is the time to have them set up or improved.”

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