Canadian pension plans’ funded position did well in Q4 2020 despite COVID-19, but the Mercer Pension Health Index indicates that major risks lie ahead because of the economic damage caused by the pandemic.
“The funded positions of defined benefit plans endured a gut-wrenching decline in Q1, but most are now back at or close to their pre-pandemic level,” said Ben Ukonga, principal in Mercer’s Financial Strategy Group. “Canadian DB plans remain well-funded by historical standards, even with liabilities measured at today’s ultra-low interest rates.”
Significant risks linger
With the recovery in funded positions from the lows of March 2020, the rollout of the COVID-19 vaccine, and the anticipated re-opening of the global economy, there is cause for optimism for 2021 and beyond. However, significant risks will linger, including the pace at which the pandemic subsides, significant increase in debt levels, persistent low interest rates and geo‑political tensions.
“Looking ahead, we have to expect continued volatility as markets react to how governments and business leaders transition to the post-COVID global economy,” said Ukonga. “Plan sponsors should not be complacent now that the end of the pandemic appears in sight.”
Index up two per cent from beginning of 2020
The index represents the solvency ratio of a hypothetical defined benefit (DB) pension plan, which it says increased from 107 per cent at the end of September to 114 per cent at the end of December, and is up two per cent from the beginning of 2020.
The median solvency ratio of the pension plans of Mercer clients was at 96 per cent on December 31, up from 93 per cent on September 30, but lower from 98 per cent at the beginning of the year.
During the fourth quarter of 2020, funded positions of DB plans continued to recoup the losses incurred in the first quarter. The improvement was primarily driven by equity markets, aided by slightly higher bond yields, and the impact of the recent changes to the Canadian Institute of Actuaries’ commuted value standards.
