Canadian pension plans hit record solvency on higher interest rates

Canadian defined-benefit pension plans have reached their healthiest level ever, thanks to rising interest rates that offset stock market losses. A report from Marsh & McLennan Companies Inc. revealed that the median solvency ratio of 435 pension plans tracked hit a record high of 132.5% in the third quarter. This means these plans now hold an extra 32 cents for every dollar promised to beneficiaries.

The improved solvency ratios were driven by higher interest rates, which reduced actuarial liabilities and more than made up for negative investment returns during the quarter. The Bank of Canada’s overnight lending rate has remained at 2.25% since last October, but bond yields have been climbing due to concerns over inflation and rising debt loads.

Marsh reported that 69% of defined-benefit plans now have a solvency ratio above 120%, while 89% have a ratio of at least 100%. Only 11% of plans are in a deficit position. The Financial Services Regulatory Authority of Ontario noted that DB plans in the province had a median solvency ratio of 127% at the end of the second quarter.

With many pension funds now holding surpluses, Marsh suggested that this could be an opportune time to adjust investment strategies. A global poll of 430 portfolio managers found that Canadian asset owners are reducing their exposure to U.S. equities and increasing investments in infrastructure, aligning with recent discussions among Canadian pension investors.