Global professional services firm, Aon plc has updated the Aon Pension Risk Tracker which calculates the aggregate funded position for companies in the S&P/TSX Composite Index with defined benefit (DB) pension plans. The firm found that the aggregate funded ratio for plans increased in 2022, assets decreased and higher interest rates decreased plan liabilities.
The aggregate funded ratio for Canadian pension plans in the index with DB plans increased from 96.9 per cent to 100.8 per cent at the end of 2022. According to the risk tracker, that number sat at 98.7 per cent at the end of the third quarter in 2022.
Pension assets lost 15.6 per cent over the year, poor performance that was offset by an increase in interest rates which in turn decreased plan liabilities.
“The long-term Government of Canada bond yield increased 160 basis points relative to the last year-end rate, and credit spreads widened by 45 basis points. This combination resulted in an increase in the interest rates used to value pension liabilities from 2.77 per cent to 4.82 per cent,” they write. “Given that most pension plans in Canada are still exposed to interest rate risk, the decrease in pension liability caused by increasing rates offset the negative effect of asset returns on the funded status of the plans.”
Nathan LaPierre, partner, wealth solutions with Aon says “many pension plans will be starting 2023 in a very good financial position. Plan sponsors can use this favourable position to reduce risk in their asset allocations or through pension risk transfer activities.”