More than 60% of Canadian defined benefit pension plans were fully funded in Q3 as pensions had the highest solvency position in 18 years, according to Mercer’s Pension Health Index.
The index represents the solvency ratio of a hypothetical pension plan. The ratio was 112% at the end of September, a rise from 107% at the end of June and 106% at the beginning of the year, a release from Mercer said.
Less than 5% of pension plans were below 80% funded on a solvency basis.
A rise in the long-term interest rates of 20 basis points in September boosted the funded position of pension plans, the release said. Other factors affecting pension plans included the strong performance of U.S and international equity markets.
A typical balanced pension portfolio would have dropped by 0.1% during Q3, the index said. Returns from U.S. and developed market equities rose, while Canadian equities were slightly negative. Canadian and emerging market fixed income were also down.
Rethinking risk strategies
Some plan sponsors are rethinking their risk strategies due to the improvement in funded positions and changes to funding rules in Ontario and Quebec, the release said.
“Some plan sponsors, particularly those that are not fully funded and that remain open to new members, feel emboldened by the new funding rules to maintain or even increase investment risk,” the release said.
“On the other hand, this seems like a particularly opportune time for sponsors of closed and frozen defined benefit plans to take risk off the table, either by changing the asset mix or through risk transfers.”