The financial health of Canadian defined benefit pension plans is robust, with solvency surpluses reaching record highs, to the point where many employers are now benefiting from contribution holidays. Yet the Iranian conflict is fuelling fears of a global economic shock. So where is the disconnect?
At the time of writing, Brent crude oil is trading above US$115 per barrel, a peak reached after a 30 per cent surge within a few hours, not seen since the start of the war in Ukraine four years ago. The spike is linked to the blockade of the Strait of Hormuz, through which roughly 20 per cent of the world’s oil and liquefied natural gas (LNG) flows transit, against the backdrop of the Iranian conflict.
At the same time, the Mercer Pension Health Pulse Index exceeded a solvency ratio of 132 per cent at the very end of 2025. It has continued to climb since the beginning of 2022.
As of March 31, 2026, the median solvency ratio stood at 123 per cent for Canada’s 435 defined benefit (DB) pension plans. As a result, 60 per cent of plans report solvency levels of 120 per cent or more, while 13 per cent remain in deficit. What do these figures mean?
“Plans are financially healthy and very often in surplus. We haven’t seen this very often over the past 20 years,” says Mathieu Tessier, Vice-President, Client Relationships and Innovation, Defined Benefit Solutions, at Sun Life.
Tessier notes that the Mercer Index remained below 100 per cent between 2008 and 2022. “We came close to being underfunded several times during that period when we were in deficit,” he says. “Since 2021, we have crossed the 100 per cent threshold. After lagging for decades, pension plans now have sufficient assets to meet their obligations to members.”
Growth in group annuities
Tessier points out that a plan still exposed to equity markets without adequate interest rate hedging could end up with a smaller surplus or even a deficit. “That is why some plan sponsors have decided to reduce risk by purchasing group annuities managed by insurers,” he says. “By converting the bond portfolio into a group annuity contract, they eliminate credit risk linked to interest rate fluctuations, as well as longevity risk associated with the population covered by the plan.”
According to LIMRA and Sun Life, the Canadian group annuity market declined from $11 billion in 2024 to $6.8 billion in 2025. This figure relates to 115 DB plan sponsors representing 30,000 members. In total, 35 sponsors reportedly transferred risk to insurers, for a value of $1.3 billion.
F. Hubert Tremblay, Partner and Actuary at Mercer, notes that before 2020, employers had to fund significant solvency deficits through solvency funding contributions and large-scale special payments, according to rules that vary across provincial and federaljurisdictions. “Today, it is normal to see contribution holidays. The law allows it,” he says. This is especially true since tax regulations require this measure to be implemented once a plan surplus reaches a certain threshold.
Like everyone else, Tremblay is watching the current market volatility tied to geopolitical issues. However, he emphasizes the strong resilience of pension plans. “The key metrics are well known: the impact on equity markets, interest rates, and inflation,” he says. “Despite this, plan sponsors remain comfortable with the current level of risk.”
Given the size of today’s buffers, sponsors are not pessimistic despite current events. Tremblay does not believe benefits are at risk, even in the event of a market pullback. “In the past, we experienced declines of 15 per cent to 20 per cent when solvency levels were at 100 per cent or lower. Today, we are at 123 per cent,” he points out.
Not all plans are alike
“It is important to avoid lumping all plans together. Some remain open and continue to welcome new members, while others are closed. As a result, they do not have the same risk management or investment policies,” assert Claude St-Laurent, Associate Partner in the Retirement and Asset Management Team, and Isabelle Clément, Partner in the Retirement Practice, at Normandin Beaudry.
Closed plans, they note, are generally more risk-averse.
St-Laurent and Clément argue that the industry has applied difficult lessons learned from the 1990s by building sufficient buffers to withstand possible solvency deficits. Today’s contribution holidays represent, in a way, a welcome swing of the pendulum.
“The surpluses accumulated during the 1990s were depleted during the crises of 2001 and 2008,” recalls St-Laurent. “Many plans were closed. Sponsors of the plans that remained in place implemented several strategies to build financial cushions.”
It should be remembered that during that period, many employers, especially in the private sector, chose to replace defined benefit plans with defined contribution plans, under which they are not required to fund solvency deficits.
Current contribution holidays do not concern Clément, despite today’s market volatility. “This is part of a robust risk management framework,” she says. “Sponsors have ensured that they are able to deliver the promised benefits to members. The industry learned from the crises of 2000 and 2008. There have been several legislative changes. Plans are now assessed using assumptions that are much closer to market conditions than they were in the 1990s, when there was a certain disconnect.”
The current environment is exceptional, acknowledges St-Laurent. Markets continue to surprise, despite crises such as the war in Ukraine or growing government debt and deficits. “In this context, we need a long-term vision and strong asset diversification, and we must avoid giving in to emotions or trying to time the market,” he says.
They observe that pension plan decision-makers are now strongly guided by prudence. Have they been traumatized by past financial crises? “There has been a learning process across the entire industry,” they conclude.
