Industry News

Gains from surging equity markets were partially offset by falling long-term interest rates

By James Langton |

Recent strong equity markets have boosted the funding status of Canadian defined benefit (DB) pension plans, according to data published on Wednesday by Mercer Canada.

The Mercer pension health index, which measures the funding status for a hypothetical DB plan, rose from 102% at the start of 2017 to 106% by the end of the year. The median solvency ratio of the DB pension plans of Mercer's clients rose from 93% to 97% during 2017.

Surging stock markets were primarily responsible for the improvement in funding levels, Mercer Canada says in its announcement.

In the fourth quarter alone, Canadian stocks gained about 4.5%, U.S. equity returns were even better at 6.8%, and international equities gained 4.5%. Both U.S. and international equity returns were boosted by a depreciation in the Canadian dollar against the local currencies. Canadian bonds also generated positive returns in the fourth quarter, as yields declined.

On the heels of these strong returns, "Canadian DB pension plans are better funded now than they have been for most of the past decade," says Manuel Monteiro, leader of Mercer Canada's financial strategy group, in a statement.

However, the firm also sounds a note of caution about the future prospects for equities. "Although Canadian equities are up over the fourth quarter and overall for the year, we have observed a heightened level of volatility in the domestic equity market over recent periods given the concentrated reliance on cyclical resource based sectors," says Sofia Assaf, principal and senior investment consultant at Mercer Canada, in a statement.

"We see a persistent and growing trend among institutional investors in reducing domestic equity bias and shifting toward a holistic global approach to equity management, in large part due to the implications of the Canadian equity market sector concentration on potential risk/return outcomes," she adds.

Mercer also notes new funding rules in Ontario are good news for DB pension plan sponsors, as they will, "significantly reduce the volatility of contributions that sponsors need to make to their plans," and may reduce the level of contributions for most plans.

"The new Ontario rules follow similar changes implemented in Québec and will likely place further pressure on other Canadian policymakers to adopt similar measures," Mercer says.

Additionally, with enhancements coming to both the Canada Pension Plan and the Quebec Pension Plan, Mercer expects plan sponsors to revisit their plan design strategies in 2018.