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As stocks and bonds were pummelled in the second quarter of this year, rising yields boosted the solvency of Canadian defined-benefit (DB) pension plans, a report from Mercer Canada says.

The median solvency ratio among the nearly 50 Canadian pension plans, in Mercer’s database,  increased to 109% in the quarter ended June 30, up from 108% on March 31.

The ratio improved even as inflation soared, with central bankers aggressively raising rates and increasing recession fears. A typical balanced pension portfolio would have dropped 12.1% in Q2, the report said.

However, bond yields across all different durations increased between 80 and 100 basis points in the quarter, Mercer said, bringing year-to-date yield increases to between 160 and 230 basis points.

“Despite the significant negative returns on the asset side of the equation, the steep rise in bond yields has had a very favourable impact on the financial position of most DB plans,” said Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary, in a release.

The report estimated that almost three-quarters (73%) of plans are in a surplus position on a solvency basis. Another 16% have solvency ratios between 90% and 100%, 5% have ratios between 80% and 90%, and 6% of plans have solvency ratios below 80%.

While most plans appear to be on a sure footing now, the report warned of considerable risks ahead.

“However, with the increased risk of a recession, continuing conflict in Ukraine, historic high levels of inflation, and the volatility of the financial markets, DB plans’ funded positions can be expected to remain extremely volatile,” Ukonga said.