Rising bond yields helped lift Canadian defined benefit (DB) pension plans to their highest funded positions in more than 20 years, according to a report from Mercer.
The latest Mercer Pension Health Index found that the average solvency ratio for DB plans reached 124% at the end of the first quarter, up from 114% in Q4 2020, and the highest level since the index’s inception in 1999.
The median solvency ratio was 104% in Q1, up from 96% in Q4 2020.
Although many plans experienced negative returns in Q1, their funded positions improved due to bond yields increasing by “a remarkable” 77 basis points during the quarter, Mercer noted. Approximately 66% of Mercer’s DB clients are now in a solvency surplus.
“In March 2020, as markets were experiencing a gut-wrenching freefall, nobody would believe that pension plans would be breaking funded position records only a year later,” Ben Ukonga, principal in Mercer’s financial strategy group, said in a statement.
While a gradually improving global economy is cause for optimism, Mercer noted that increased inflation expectations could hamper the economic recovery, equities markets returns and the ability of governments, corporations and individuals to service their debts.
“The improved positions we now see could be short lived,” Ukonga said. “Now is the time for plan sponsors to revisit their risk preferences (or tolerances) and take appropriate actions.”
Well-funded plans should consider taking defensive positions, while open plans and plans with long time horizons should remain invested in growth assets, the report suggested.