Canadian defined benefit pension plans recovered much of their solvency status in the first quarter of 2019 after a rocky end to last year, according to metrics from Mercer Canada.
The Mercer Pension Health Index, which measures the ratio of assets to liabilities for a model pension plan, was at 106% at the end of March, up from 102% at the start of the quarter, the consulting firm said.
The median solvency ratio of the pension plans of Mercer’s client base was 97%, up from 95% at the beginning of the quarter. Nearly half of Canadian pension plans are fully funded, Mercer said, and less than 5% are below 80% solvency.
A surge in global equity markets bolstered the position of pension plans in the first quarter, but “the volatility over the last few months has spooked plan sponsors and served as a reminder of how fleeting a fully funded position can be,” according to Andrew Whale, principal, Mercer Canada’s Financial Strategy Group. Some plan sponsors have used this opportunity to “lock in” a stronger position, Mercer said; purchases of annuity contracts were at near-record highs for the first quarter, with $1 billion of liabilities transferred to insurance companies so far this year.
Mercer warns that plan sponsors should strongly reconsider their funding, investment and risk management practices in light of an uncertain global market environment and recent changes to legislation in Ontario and Quebec that could mean plans wouldn’t feel the full impact of global volatility “until they are looking to settle benefits and it is too late.”
“The recent relaxing of solvency-based funding in Ontario and Quebec is a gift to plan sponsors, as it provides flexibility and protects against year-over-year volatility,” Whale said.
“On the other hand, it forces plan sponsors to be proactive in setting funding policy. Funding the bare minimum will no longer get plans with short to medium time horizons to their desired destination.”