The health of Canadian pension plans reached their best levels in more than a decade in the fourth quarter of 2013, due to strong stock markets and rising long-term interest rates, consulting firm Mercer said Thursday.
The Mercer pension health index, which tracks the funded status of a hypothetical defined benefit pension plan, stood at 106% at Dec. 31 — its highest level since June 2001.
The index started the year at 82% and stood at 98% at Sept. 30.
The firm estimated that almost 40 per cent of pension plans were fully funded at the end of 2013, compared with six per cent at the beginning of the year.
Long-term Government of Canada bond yields, a key factor in calculating the liabilities of pension plans, ended the year at 3.2%, up from 2.3% at the beginning of the year.
Mercer estimated that a one-percentage-point increase in long-term interest rates would reduce the liabilities of most pension plans by 10% to 15%.
Under a defined benefit pension, a plan pays a promised amount to retirees, while under a defined contribution plan, a member receives a set amount that they then invest to pay for their retirement.
The health of defined benefit pension plans has been a key issue for many of Canada's largest corporate names as record low interest rates drove up the liabilities of plans and forced the companies to make large contributions.
Rising costs have also helped defined contribution pension plans gain in popularity as their costs are more predictable than a defined benefit plan and not susceptible to swings in interest rates or the stock market.
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