TORONTO – Defined-benefit pension plans in Canada generally ended 2017 in better financial condition than they’ve experienced for most of the past decade, according to figures released Wednesday by Mercer.
The international pension consulting firm’s Canadian index of pension health — based on a hypothetical, representative fund — stood at 106 per cent on Dec. 29, up from 102 per cent at the beginning of the year and a dismal 70 per cent after the 2008-09 financial crisis.
“Equity markets had crashed and interest rates were very low. And both those things meant that pension plans were pretty poorly funded,” said Manuel Monteiro, who leads Mercer Canada’s financial strategy group.
Two major reasons for the turnaround have been extra payments by plan sponsors and the recovery of stock prices.
“Interest rates haven’t really helped. … But equity markets have done well and companies have putting lots of money into these pension plans to get them fully funded,” Monteiro said.
According to Mercer estimates, a typical balanced pension portfolio with a combination of equity and fixed-income investments would have returned 5.3 per cent during the fourth quarter of 2017.
The firm said many of the Canadian defined-benefit pension plans that it tracks were fully funded, or very close to fully funded, at the end of the year.
The median solvency ratio for Mercer’s 604 pension clients in Canada was 97 per cent — meaning half of the pension plans had enough assets to cover at least 97 per cent of their obligations.
That’s an improvement from the end of 2016, when the median solvency ratio for Mercer clients was 93 per cent.
Looking ahead, however, Monteiro cautioned that plan sponsors should consider lowering their level of investment risks.
“Obviously, if we do have another market downturn, we could see the funded positions of the plans deteriorate pretty significantly,” he said.
Defined-benefit plans have become less common in recent years because of the cost and financial risk they pose to employers if investments perform poorly.
According to a Statistics Canada report issued summer, defined-benefit plans accounted for 67.1 per cent of employees with a registered pension plan in 2015, down from a rate of over 90 per cent in the 1980s.
Many employers have opted for other retirement options that put them at less financial risk and two provinces — Quebec and Ontario — have moved to relax the rules for defined-benefit plans under their jurisdiction.
Monteiro said both Quebec and Ontario have moved away from requiring that a defined-benefit pension plan have enough assets to cover retirement benefits even if the sponsoring company goes out of business or can’t make up the fund’s shortfall.
“They’re basically saying that you don’t need to keep your plan fully funded on a solvency basis. You only have to keep it funded on a going-concern basis, which assumes that the plan and the company can continue forever.”
The federal government introduced legislation to create a new category of target benefit plans that would give plan sponsors leeway to reduce the level of retirement benefits if its unfunded liabilities reach a certain threshold — but that proposal is still before Parliament.
Monteiro said that his sense is that the federal government may not bring in target benefit plans or do so very slowly, and that there may not be many sponsors that make the switch from defined-benefit plans.
“But if they did, it would tend to push this index down because plans wouldn’t have to fund on a solvency basis.”