Defined benefit plans hold 121% solvency, but FSRA warns of risks from falling interest rates
The Financial Services Regulatory Authority of Ontario (FSRA) has published its Q3 2024 Solvency Report, highlighting a robust median solvency ratio of 121 percent for defined benefit (DB) pension plans.
However, this represents a 2-percentage point decline from the previous quarter, marking the end of a seven-quarter upward trend. Despite this, 90 percent of plans remain fully funded on a solvency basis, with only 2 percent reporting ratios below 85 percent.
Investment performance in Q3 was positive across all asset classes, with a net return of 6.3 percent. However, declining solvency discount rates offset these gains by increasing pension liabilities.
FSRA Chief Actuary, Lester Wong, noted that with inflation easing, potential reductions in interest rates could further impact funding levels.
“This serves as an important reminder for plan sponsors and administrators to stay alert, future-focused, and strategic in managing risks as market conditions evolve,” Wong said.
The report underscores the importance of proactive risk management, encouraging pension plan sponsors to utilise stress tests, modelling, and other analytical tools to reassess investment strategies and enhance resilience.
FSRA’s solvency report also contextualises broader economic trends. Canadian GDP grew by 1.5 percent year-over-year in July 2024, while inflation dropped to 2 percent by August.
However, the shelter component of the consumer price index (CPI) remained elevated at 5.3 percent. Meanwhile, the Canadian policy interest rate declined twice during the quarter, ending at 4.25 percent.
The shift in market conditions contributed to increased pension liabilities. Notably, the FTSE Canada Universe Bond Index yielded a return of 4.7 percent, and the S&P/TSX Composite Index delivered a strong 10.5 percent return.
FSRA continues to encourage plan sponsors to develop and maintain effective governance frameworks. These frameworks should address key risks, including fluctuations in funding costs and the likelihood of meeting benefit obligations under varying conditions.
As part of its supervisory role, FSRA releases quarterly solvency reports to ensure transparency and provide plan members with timely insights into their pension plan's financial health.
The Q3 2024 report highlights the importance of balancing investment gains with market liabilities to safeguard the stability of Ontario’s defined benefit pension plans.
