Pension plans reach near record solvency ratios
Canadian defined benefit (DB) pension plans finished 2024 on a high note, experiencing significant improvements in their funded positions during the final quarter of the year. According to Mercer’s Pension Health Pulse (MPHP), the median solvency ratio of the DB plans in its database rose to 125% as of December 31, 2024, approaching a record high. This marked a notable improvement from 122% as of September 30, 2024, and a substantial increase from 116% a year earlier.
The solvency ratio, a key indicator of a pension plan’s financial health, reflects the relationship between assets and liabilities. Mercer noted that a ratio above 100% suggests that a plan has more assets than liabilities, signaling financial stability.
“Asset performance was generally strong during the quarter, and liabilities were either stable or slightly declined,” said Jared Mickall, principal and leader of Mercer’s wealth practice in Winnipeg. “From a solvency perspective, DB pension plans for Canadian workers appear to be generally sound.”
Quarterly performance boosts solvency ratios
During the fourth quarter of 2024, Canadian pension plans saw positive returns across major asset classes, which contributed to their improved solvency ratios. Additionally, liabilities either remained stable or decreased, providing further support to the financial health of these plans. As a result, 88% of the plans in Mercer’s database had solvency ratios above 100% by the end of December, up from 87% in the previous quarter and 83% at the start of the year.
The quarter’s performance was influenced by two rate cuts from the Bank of Canada. On October 23, the bank reduced the overnight rate to 3.75%, followed by another reduction to 3.25% on December 11. These cuts had a direct impact on the liability calculations for DB plans. While interest rates on longer-duration bonds showed stability or slight increases, plan sponsors will need to remain vigilant about interest rate and credit spread movements, Mercer highlighted.
Inflation eases, but challenges remain
Inflation in Canada continued to ease in the final months of 2024, with November’s rate at 1.9%, within the Bank of Canada’s target range of 1% to 3%. However, some inflation components, such as food and shelter, remained elevated. Pension plans with inflation-related benefits will need to closely monitor inflation’s potential impact on their obligations in both the short and long term.
Looking ahead
Despite the positive performance in 2024, Canadian DB pension plans are entering 2025 with an uncertain economic outlook. Potential tariffs from a new US administration could add volatility to markets and affect the Canadian economy. Mercer advises pension plans to prioritize robust risk management strategies to address potential financial headwinds in the year ahead.
“Canadian DB pension plan sponsors and their members have made significant strides to improving their plans’ financial positions in recent years,” Mickall said. “As we enter an uncertain 2025, DB plans should make a New Year’s resolution to manage their financial positions for benefit security and contribution stability.”
