
By F. Hubert Tremblay, Partner, Mercer Canada
Special to Financial Independence Hub
The last few years have thrown a number of hurdles on the markets. A pandemic and the recovery phase have been accompanied by recent additional uncertainty from the collapse of Silicon Valley Bank and fears of a global banking crash. Canadians looking at their retirement savings realize how volatility can affect their accounts and might have to save more to meet their retirement objectives or delay retirement.
Despite this volatility, the financial positions of defined benefit (DB) pension plans continued to improve over the last quarter, as indicated by the Mercer Pension Health Pulse (MPHP).
The MPHP, which tracks the median solvency ratio of the DB pension plans in Mercer’s pension database, rose in Q1, finishing the quarter at 116 per cent, a jump of 3 per cent from the beginning of 2023. This is on top of a remarkable jump of 10 per cent during 2022.
While the global banking crisis continues to wreak havoc on markets, a strong January and February helped ensure that Canadian DB plans remained unaffected, and most continued to improve. In fact, many plans’ funded positions finished the quarter in better positions than they have been in 20 years. However, looking ahead, there are several factors that may create more volatility and uncertainty for DB plans:
The global economy at play
The global economy entered 2023 juggling multiple risks. Around the world, central banks were focused on tackling inflation by increasing their policy interest rates and other qualitative tightening activities. On the heels of the failure or takeover of high-profile banks in both the U.S. and Europe, policymakers must now weigh the consequences of continuing these tightening measures with the need to stabilize the banking sector overall.
The war in Ukraine – with no signs of resolution in the near future – could also mean continued global tensions and a reduction in global trade, all of which will negatively impact the global economy.
In North America, there is increased political polarization in the U.S., with the debt ceiling needing to be raised but neither side compromising to reach an agreement. The consequences of the American government debt default would be disastrous for global financial markets.
The Canada equation
North of the border in Canada, in addition to the inflation scenario, Ottawa’s decision to cease issuing real return bonds (RRBs) and proceed with Bill C-228 caused a stir among pension stakeholders. Continue Reading…