In August, the funded status of a typical pension plan increased on both a solvency basis and on an accounting basis.
The representative pension plan portfolio returned 1.3 per cent for the month, driven by strong gains across equity markets.
The global developed and emerging equity markets index returned 1.8 per cent in Canadian dollar terms and Canadian equities finished the month with a return of 4.8 per cent.
Short-term Government of Canada bond yields decreased by approximately 0.12 per cent and long-term Government of Canada bond yields increased by approximately 0.07 per cent over the month of August. Meanwhile, corporate bond credit spreads slightly widened across all durations, increasing by 0.03 to 0.08 per cent.
Market expectations for long-term inflation (the break-even inflation rate) were approximately 2.04 per cent at the end of August, which represents an increase of 0.04 per cent since the end of July.
“Favorable market conditions for pension plans persisted throughout August with a particularly strong month for Canadian equities” says Ryan Yeo, Principal in TELUS Health’s Consulting team. “Underlying the ongoing bull market is a number of concerning factors, including uncertainty about the future of trade and a weakening Canadian economy, which have renewed expectations of rate cuts by the Bank of Canada.”
“A robust risk management framework remains of key importance in the current economic environment - not only for defined benefit plan sponsors, but also for trustees and administrators who oversee other types of plans like multi-employer pension plans and defined contribution plans. Risk factors are correlated but in an often-surprising way, so it is important to consider how downside events may affect the plan’s ability to deliver promised benefits or maintain contribution levels in addition to a deterioration in funded status. For example, a stalling Canadian economy may impair the sponsor’s ability to make contributions at a time when deficit contributions are needed or adversely affect member’s benefits at retirement.”
“However, risk management doesn’t have to mean de-risking. The definition for each plan will be different. Strong funding positions and evolving governance frameworks present an opportunity for all stakeholders—sponsors, trustees, and administrators—to revisit the role of their pension plans within their organizations or sectors. Whether it’s considering indexation catch-up, reviewing contribution levels, or enhancing member communications, the focus remains on benefit adequacy and long-term sustainability.”
Click here to read the August report.