Defined benefit pension funding increases in the first quarter of 2024

Two measures of defined benefit (DB) pension plan health in Canada were published April 1, showing an improvement in the aggregate funded ratio of defined benefit plans being managed for companies in the S&P/TSX Composite Index, and an improvement in the solvency ratios of DB plans in Mercer’s pension database.

The Aon Pension Risk Tracker figures, published by Aon plc, show pension assets gaining 2.9 per cent in the quarter ended March 31. The risk tracker calculates the aggregate funded position on an accounting basis for companies in the composite index with DB pension plans. It increased from 100.7 per cent at the beginning of the year to 105.1 per cent three months later.

“The long-term Government of Canada bond yield increased 32 basis points relative to the previous quarter rate and credit spreads narrowed by nine basis points. This combination resulted in an increase in the interest rates used to value pension liabilities from 4.42 per cent to 4.65 per cent,” Aon states. “We expect de-risking and risk transfer activities to continue.” 

Median solvency ratio 

The Mercer Pension Health Pulse, meanwhile, tracks the median solvency ratio of the DB plans in the firm’s pension database. The measure sits at 118 per cent as of March 29, up from 116 per cent at the end of December 2023.

In the first quarter, the firm states that it observed overall strengthening of solvency ratios. “DB plans that used fixed income leverage may have experienced stable or improved solvency ratios over the quarter. But plan sponsors should resist complacency, taking this opportunity to revisit risk management practices and prepare for potential adverse financial events,” they write, adding that monitoring long-term interest rates on Canadian bonds, as well as the overnight rate, would be an ongoing focus for DB pension plan stakeholders. 

“For DB pension plans in the enviable position of enjoying a surplus, having an effective strategy for its use should be on the agenda,” they continue. “While a strategic annuity purchase is top of mind for many DB pension plans, a tailored investment strategy is a viable, and in some cases the only feasible alternative to annuitization.”