Gains in the stock market and stable interest rates meant Canadian pension plans kept climbing back to health in the third quarter, but experts question whether the recovery will last.
Two consulting firms say their measures of the health of defined benefit (DB) pension plans suggest the typical Canadian plan’s solvency funding – which is the ratio of its assets to the estimated cost of paying the future benefits the plan has promised – are getting closer to precrisis levels of funding.
Consulting firm Mercer Canada Ltd. said its pension health index, which represents solvency funding at a hypothetical Canadian DB plan, closed Sept. 30 at 107 per cent, up from 101 per cent at the end of March, but still below 112 per cent at the end of 2019.
Mercer said the median funding ratio among its clients was 93 per cent on Sept. 30, up from 91 per cent on June 30, but down from 98 per cent at the beginning of the year.
Aon PLC said its measure of DB pension solvency in Canada, which approached record highs in the fourth quarter of 2019, hit 99.0 per cent on Sept. 30, up from 95.4 per cent on June 30, but still below 102.5 per cent on Jan. 2.
Canadian plans dropped from an average of 100 per cent funded on Dec. 31 to a range between 80 per cent and 90 per cent in the depths of the stock-market collapse in mid-March. The Mercer index was 93 and the Aon measure was 89.1 per cent on March 31, days after the stock-market bottom.
Pension plans were hit by a double-whammy in the early days of the COVID-19 market crisis. Stocks plummeted by more than a third, damaging the value of plan assets. And interest rates on government bonds fell, which, according to pension math, made the the current value of DB plans' future liabilities bigger. During the volatile action in markets in March, the two firms' measures of pension health sometimes swung multiple percentage points in a single day.
Ontario pension funding rules require DB plans to have a solvency ratio of at least 85 per cent, or else employers have to make extra payments to push their pensions back to that level. Plans only need to file their funding levels once every three years, however, meaning many plans will likely file the healthy numbers they had as of last Dec. 31.
Since March 31, stock markets have rebounded, adding back to plan assets. But interest rates remain low.
Manuel Monteiro, leader of Mercer Canada’s Financial Strategy Group, says his firm is counselling pension clients to be wary. “When we’re looking at pension health and what’s going on in the real economy, there’s a real disconnect,” he said.
Political unrest in the United States, the uptick of the virus in Canada and the uncertain timetable of a COVID-19 vaccine make him question current equity prices and whether plans that have heavy weightings in equities are taking on too much risk. “It seems to me there’s more downside than upside at this point.”
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David Milstead