A rally on the stock market in the fourth quarter helped boost the strength of Canadian defined benefit pension plans, according to a new report by Mercer Canada.
The consulting firm said its pension health index, which represents the solvency ratio of a hypothetical defined benefit pension plan, rose to 114% at the end of December from 107% at the end of September.
In the fourth quarter, funded positions of defined benefit plans continued to recoup the losses incurred in the first quarter - helped by a rally in equity markets, aided by higher bond yields and changes to the Canadian Institute of Actuaries' commuted value standards, Mercer said.
The median solvency ratio of the pension plans of Mercer clients was at 96% at December 31, up from 93% on September 30, but down from 98% at the beginning of 2020. A solvency ratio of 100 or more indicates a plan is fully funded while anything less indicates there would be some shortfall if a plan had to be wound up.
A separate report by Aon also concluded that financial health improved in 2020 for Canadian defined benefit pension plans. That report said pension assets had a 9.9% return over 2020 and ended the fourth quarter up 3.9%.
However, given that a majority of the defined benefit pension plans in Canada are exposed to interest rate risk, Aon said that defined benefit plan managers will need to grapple with lower return expectations stemming from the current ultra-low interest rate environment.
