Defined benefit plans finish 2023 higher despite fourth quarter pullback

Canadian defined benefit (DB) pension plans lost ground in the fourth quarter of 2023, by a few measures, but eked out gains for the year overall, according to the Aon Pension Risk Tracker and the Mercer Pension Health Pulse, quarterly reports on the funded positions and solvency ratios of DB plans in Canada.

According to Aon, the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index increased from 100.7 per cent to 101.8 per cent during the past 12 months. The risk tracker, comparatively, sat at 105.6 per cent at the end of the third quarter in 2023. The Aon Pension Risk Tracker calculates the aggregate funded position on an accounting basis for companies in the composite index with DB plans.

The Aon report goes on to say pension assets gained 12. 4 per cent over the year in 2023, while pensions saw a decrease in the interest rates used to value pension liabilities from 4.84 per cent to 4.5 per cent. “Asset returns from growth assets such as equities and alternatives offset the increase in pension liabilities caused by decreasing interest rates,” Aon researchers write, adding that the year was volatile for pension plans. Despite this, annuity purchases are expected to continue, as most pension plans in Canada still ended 2023 “in good shape.” 

The Mercer Pension Health Pulse, meanwhile, a measure which tracks the median solvency ratio of the DB plans in Mercer’s pension database, was 116 per cent at the end of December 2023. The number is a notable decline from 125 per cent, recorded at the end of September 2023, but is an improvement over the 113 per cent reported at the beginning of the year. The Mercer database contains information on nearly 500 pension plans across Canada, in every industry.

“The solvency ratio is one measure of the financial health of a pension plan,” Mercer states. “Throughout Q4, plans saw positive asset returns, but these returns were not enough to offset plans’ increased DB liabilities which resulted in an overall weakening of solvency ratios.” 

They say in addition to improved median solvency ratios, there are more DB plans with solvency ratios above 100 per cent today.

As for interest rates, Mercer says “it is unclear whether the interest rates which apply to DB plans will stabilize in 2024, and if so, at what level. As such, interest rates continue to pose a significant risk for many DB pension plans.” They add that the role of artificial intelligence as part of pension plan risk management will emerge as a consideration in 2024.