Aon and Mercer reports highlight stability in Canadian pension plans despite Q2 volatility and economic shifts
Aon plc announced that the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index remains unchanged at 105.3 percent compared to the end of the first quarter.
This stability is reflected in the Aon Pension Risk Tracker, which allows plan sponsors to track their individual plan's funded status daily. Pension assets gained 1.5 percent over the quarter, while the long-term Government of Canada bond yield increased by 5 basis points, and credit spreads narrowed by 4 basis points.
These changes resulted in a slight increase in the interest rates used to value pension liabilities, from 4.65 percent to 4.66 percent. Nathan LaPierre, partner in wealth solutions at Aon, stated, “The second quarter of 2024 saw pension plans maintain their healthy funded positions.”
In contrast, Mercer's report indicated volatility in the financial health of Canadian defined benefit (DB) plans. The Mercer Pension Health Pulse (MPHP) showed that the median solvency ratio of DB pension plans was 118 percent at the end of June, the same as at the beginning of the quarter.
However, this ratio fluctuated, peaking at 123 percent in April and then declining to 118 percent by the end of June. Positive asset returns from fixed income assets, US equities, and international equities were generally offset by negative returns from Canadian equities and increased DB liabilities.
Jared Mickall, principal, and leader of Mercer’s Wealth practice in Winnipeg, noted, “The interest changes and market volatility during this quarter is a good reminder that a DB plan’s funded position can change quickly, and plan sponsors should plan accordingly.”
The Bank of Canada reduced the overnight rate to 4.75 percent from 5.00 percent on June 5, anticipating that inflation will move towards the 2 percent target. Canadian inflation fluctuated, declining from 2.9 percent in January to 2.7 percent in April, and increasing to 2.9 percent in May.
The report also highlighted that life expectancy in Canada is expected to improve at rates greater than those currently used by the pension industry, potentially increasing DB liabilities by 2 to 4 percent.
Mickall emphasized, “It’s incumbent on DB pension plans to examine their funded positions, conduct a strategic review of the risks their plans face, and take action.”
The broader economic landscape showed varied performance across asset classes and regions. Global equities performed well, supported by resilient developed economies and the strength of the US economy. Emerging markets, particularly Brazil and India, demonstrated strong growth.
The Canadian equity market, however, declined this quarter, with sectors such as Healthcare, Real Estate, and Information Technology underperforming.
A new economic working group, chaired by Stephen Poloz, aims to identify priority investment opportunities for Canadian pension funds to spur innovation and drive economic growth.
Additionally, the federal government proposes amendments to the Pension Benefits Standards Act, 1985, to increase transparency in the investments of large federally regulated pension plans.
While the funded position of Canadian pension plans remains strong, the volatility and evolving economic conditions highlight the need for ongoing strategic review and risk management.
