Defined Benefit pension plans continue to perform, despite ongoing market volatility

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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.

RRBs are a key tool for pension plans and insurance companies to hedge inflation and manage risk. Eliminating new RRBs will ultimately eliminate this tool altogether. While there are alternative assets available to help manage the inflation risk, they aren’t without issue. If the federal government upholds this decision, Canada will be the only G7 country that does not offer inflation-linked bonds.

Bill C-228 is an act to amend the Bankruptcy and Insolvency Act and the Companies Creditors Arrangement Act but the passage could have unintended consequences for DB plans, their members and sponsors. The Bill could mean higher borrowing costs and stricter loan covenants. It could also lead to plan sponsors closing their DB plans altogether. Additionally, DB plan sponsors who fall into financial distress may be unable to raise funds.

Looking ahead

 While pensions have shown great strength for so long even in the face of incredible uncertainty, many are wondering how long this will last. As 2023 continues, DB plan sponsors will need to be prepared for more volatility, with appropriate risk management programs and efficient governance structures in place to weather the ongoing storm.

Hubert Tremblay is a partner with Mercer Canada. He is working as client manager, strategic consultant and actuary for organizations of all size on all aspects of the management of their pension plans. Mercer believes in building brighter futures by redefining the world of work, reshaping retirement and investment outcomes, and unlocking real health and well-being. Mercer’s approximately 25,000 employees are based in 43 countries and the firm operates in 130 countries. Mercer is a business of Marsh McLennan (NYSE: MMC), the world’s leading professional services firm in the areas of risk, strategy and people, with 85,000 colleagues and annual revenue of over $20 billion USD. Through its market-leading businesses including MarshGuy Carpenter and Oliver Wyman, Marsh McLennan helps clients navigate an increasingly dynamic and complex environment. For more information, visit Follow Mercer on Twitter @MercerCanada. 




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