The lower funding levels introduced by the Québec and Ontario governments are cushioning the shock of the COVID-19 pandemic on the solvency of fixed benefit pension plans, the Mercer Pension Health Index reports.

March was a gruelling month for defined pension plans, the actuary firm reports. The index that reflects the solvency ratio of a hypothetical defined benefit plan sank 112% at the end of 2019 to 103% in late February, and plunged to 93% at the end of March. The median solvency ratio of Mercer clients’ pension plans was 84% at March 31, down sharply from 98% on December 31, and 93% on February 29.

Mercer notes that in March 2020, capitalization levels hit their lowest point since 2013. However, they rebounded slightly since then as long-term bond yield increased just prior to quarter end.

Beneficial relief

Many DB plan sponsors may not even feel the effects of COVID-19 on their finances, if they are affected by the recent reform that lowered solvency funding, such as in Ontario and Quebec, says F. Hubert Tremblay, Wealth Management Principal at Mercer Canada.

For example, capitalization requirements were eased in Ontario in 2018 for most of the less capitalized defined benefit pension plans. In Québec, the coming into force in 2016 of the Act to amend the Supplemental Pension Plans Act triggered many changes, mainly regarding the funding of defined benefit pension plans. This relief was implemented on December 31, 2019 in BC, the actuary firm Eckler stated in a press release.

“That these market shocks occurred in Q1 has granted flexibility for these plan sponsors to take action with 2020 regulatory filings,” Tremblay adds. He explains that performing an actuarial valuation at the end of 2019 “will grant a fixed contribution schedule until 2022 and allow time for the markets to hopefully recover.”

Exceptional measures needed 

Mercer and many other players in the sector are currently arguing for the adoption of several forms of administrative and financial relief for plan sponsors and members. “These measures are aimed at ensuring Canada’s retirement system can withstand the challenges posed by COVID-19, helping to buttress Canadians’ retirement security in an uncertain time,” the firm says.

Caution crucial

Regardless of the measures taken, plans will not be unscathed by the current torment. “Evidently, capitalization levels decreased visibly and nearly all DB plans will be hit by this economic and public health crisis. However, we think that sponsors can avoid the crisis spreading to their plans by making judicious and strategic decisions,” Tremblay explains.

Other market effects include an increase in provincial and corporate bond spreads as long-term federal bond yields fell. “This phenomenon is likely fleeting if rating agencies downgrade bond issuers; however, it has introduced short-term uncertainty in measuring the liabilities of a DB plan,” he says.

“Recent market experience has had a variety of different impacts on DB plan financials,” Tremblay adds. “It’s important to consider that the day-to-day volatility will create some unexpected results. Plan sponsors must remain calm as markets figure things out, but stay alert as opportunities arise.”