During November, the funded status of a typical pension plan increased on a solvency basis and on an accounting basis.
The investment return for a representative pension plan portfolio was per cent for the month, driven by robust performances in both the bond and equity markets.
The global developed and emerging equity markets index, the MSCI ACWI, returned per cent in Canadian dollar terms. The Canadian equity index, the S&P/TSX Composite, finished the month with a strong return of per cent.
Short-term Government of Canada bond yields decreased by approximately per cent while the long-term Government of Canada bond yields decreased by approximately 0.15 per cent over the month of November. Credit spreads for short-term, mid-term and long-term corporate bonds decreased by approximately 0.08 per cent during the month of November.
Market expectations for long-term inflation (the break-even inflation rate) were approximately per cent at the end of November, decreasing by 0.03 per cent since the end of October.
“The increase in the funded ratio of a typical pension plan of more than per cent on both a solvency and accounting basis during the first 11 months of 2024 may come as a surprise to some, especially since the Bank of Canada has decreased its overnight rate by 1.2 per cent so far this year. Pension liabilities are very sensitive to prevailing interest rates with interest rate decreases tending to increase liabilities, which is why such a significant improvement in a typical pension plan’s funded ratios may seem counter-intuitive” says Gavin Benjamin, Partner in TELUS Health’s Consulting team.
“However, there are two key factors that help explain this positive outcome. First, pension plan assets have performed well so far in 2024. The investment return of the typical pension plan’s assets exceeded per cent during the first 11 months of the year, driven by positive returns of all asset classes, especially Canadian and global equities. Second, while short-term interest rates have decreased significantly as a reaction to Bank of Canada monetary policy, long-term interest rates have been less affected. Since pension liabilities are more sensitive to long-term interest rates than short-term rates, the increase in liabilities due to decreases in interest rates has been less pronounced than one might have expected. This serves as a reminder that the effects of financial market changes on the financial position of a pension plan can be complex and may also be very plan specific. Frequent monitoring of a plan’s funded status can help a plan sponsor see through the complexities and better manage the pension risks and opportunities that will emerge over time.”
Click here to read the November report.