The solvency of Canadian defined-benefit pensions declined slightly in the fourth quarter, but the plans still finished the year in a far stronger position than they began it, according to a report from Mercer Canada.
The DB plans in Mercer’s database finished the year with an average solvency ratio of 116%, which is down from 125% at the end of the third quarter but up from 113% at the beginning of 2023. Mercer also noted that more plans had solvency ratios above 100% than a year ago.
The slight decline in the fourth quarter came as both global equities and fixed markets rallied in November and December, with central banks pausing amid declining inflation and investors pricing in potential cuts to interest rates this year.
Despite the rally, lower bond yields had a negative effect on plan solvency, increasing pension liabilities.
“Interest rates on Canadian bonds with longer terms were volatile during the year and finished at levels less than they were at the start of the year,” the Mercer report said.
“It is unclear whether the interest rates that apply to DB pension plans will stabilize in 2024, and if so, at what level. As such, interest rates continue to pose a significant risk for many DB pension plans.”
With the possibility that rates decline further, it would be prudent for plans to review and possibly transfer risks by purchasing annuities, it said.