Canadian DB pensions in stronger positions to withstand challenges ahead: reports

·2 min read

TORONTO — Canadian defined-benefit pension plans are in stronger positions to withstand the potential challenges ahead from the Omicron variant after performing well in 2021, a pair of industry reports say.

A report by consulting firm Mercer found that the pension plans were well-funded despite an uncertain end to the year.

The median solvency ratio of defined-benefit (DB) pension plans within Mercer's database was 103 per cent at year-end, up two per cent from Sept. 30 and seven per cent higher than a year earlier.

Sixty-one per cent of pension plans were in surplus position at the end of the fourth quarter, compared with 53 per cent at the end of the third quarter. In addition 27 per cent were estimated to have solvency ratios between 90 and 100 per cent; seven per cent were estimated between 80 and 90 per cent; and five per cent were estimated at less than 80 per cent.

"As DB plans’ financial positions continue to improve, many plan sponsors are now finding themselves in the enviable position of having DB surpluses,” said Ben Ukonga, principal and leader of Mercer’s wealth business in Calgary in a news release.

Pension performances last year were aided by the reopening of the global economy, increases in vaccination rates and availability of vaccines.

Significant headwinds this year could come from the latest variant of COVID-19, the potential emergence of new variants, availability of vaccines in developing countries, increasing geopolitical tensions, U.S. political gridlock and the uncertainty of the U.S. midterm elections, the Mercer report said.

Additional concerns include high inflation and policy responses from central banks, along with wage increase pressures in response to turnovers and job vacancy rates.

"We continue to believe, given the improved positions of many DB plans, that plan sponsors should be revisiting their risk exposures, and where it makes sense locking-in some of these gains," Ukonga said.

Meanwhile, a report by Aon Plc says the aggregate funded ratio for Canadian pension plans for companies with defined-benefit pension plans in the S&P/TSX composite index increased to 97.2 per cent from 89.4 per cent a year earlier.

It says pension assets returned seven per cent in 2021 after ending the fourth quarter up 4.8 per cent.

"2021 was a spectacular year for Canadian pension plans funding, with both interest rates and risk-seeking assets going up," said Erwan Pirou, Canada chief investment officer, wealth solutions, at Aon.

While Omicron added uncertainty to end the year, equity markets continued their upward trajectories, said Nathan LaPierre, partner, wealth solutions, Aon.

"Plan sponsors are likely to use the significantly-improved funded positions to undertake derisking activities and protect those funded positions in 2022."

This report by The Canadian Press was first published Jan. 4, 2022.

The Canadian Press

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