In July, the funded status of a typical pension plan improved on both the solvency basis and accounting basis.
The representative pension plan portfolio reduced by 1.4 per cent in July, driven by poor performance across equity markets and Canada universe bonds. The global developed and emerging equity markets index reduced by 1.2 per cent in Canadian dollar terms and Canadian equities finished the month with a return of 1.1 per cent.
Short-term Government of Canada bond yields increased by approximately 0.17 per cent and long-term Government of Canada bond yields increased by approximately 0.27 per cent over the month. Corporate bond credit spreads increased by 0.02 per cent for short-term bonds and increased by 0.05 per cent for long-term bonds.
Market expectations for long-term inflation (the break-even inflation rate) were approximately 2.09 per cent at the end of July, which represents a slight increase of 0.03 per cent since the end of June.
“July was a useful reminder that pension plan funded positions are driven by more than investment returns. Although plan assets did not perform well in July, the typical pension plan’s solvency funded position improved due to an increase in long-term interest rates, with long-term Government of Canada bond yields increasing by 0.27 per cent during the month. DB pension liabilities are sensitive to changes to the long-term interest rates. When long-term interest rates increase, pension liabilities decrease. Similarly, a decrease in long-term rates will increase liabilities” says Gavin Benjamin, Partner in TELUS Health’s Retirement & Benefits Solutions practice.
“It is interesting to consider how much long-term interest rates have changed in recent years. At the end of July 2026, long-term Government of Canada bond yields were 4.04 per cent, 2.34 per cent higher than at the end of July 2019. The increase in long-term interest rates over recent years is one of the key reasons why many DB plans have surpluses today. However, the same dynamics that have helped pension plan funded positions could work in reverse. If long-term rates were to decrease significantly in the future, today’s surpluses could quickly become tomorrow’s deficits. Without proper risk management, a decrease in future long-term rates could quickly turn today’s surpluses into tomorrow’s deficits. With most DB plans currently in a strong funded position, now is an ideal time for sponsors to assess their plan’s exposure to interest rate risk and to take action, if appropriate, to reduce this risk so that their plan is protected against future interest rate volatility.”
