Despite Steep Losses, Canadian DB Plans End Year Fully Funded

Surging bond yields offset double-digit investment losses to push funded levels above 100%.

Canadian corporate pension plans shrugged off double-digit investment losses for the year, as their aggregate funded levels topped 100% to close out 2022 thanks to surging bond yields.

According to financial service firm Aon’s Pension Risk Tracker, the aggregate funded ratio for Canadian defined benefit pension plans in the S&P/TSX Composite Index ended 2022 at 100.8%, up from 98.7% at the end of the third quarter, and 96.9% at the end of 2021. The tracker calculates the aggregate funded position on an accounting basis for companies in the S&P/TSX Composite Index with defined benefit plans.  [Source]

The improvement came despite aggregate pension assets losing 15.6% over the year. That’s because the long-term Government of Canada bond yield advanced 160 basis points from the last year-end rate, and credit spreads grew by 45 basis points. The combination led to an increase in the interest rates used to value pension liabilities to 4.82% from 2.77%. Because most plans in Canada remain exposed to interest rate risk, the drop in pension liability caused by rising interest rates offset the negative effect the investment losses had on the funded status of the plans, Aon said.

“Asset performance was poor in 2022. The poor asset performance was offset by a substantial increase in interest rates and therefore a decrease in liabilities,” Nathan LaPierre, partner at Aon Wealth Solutions, said in a statement. “Many pension plans will be starting 2023 in a very good financial position. Plans sponsors can use this favorable position to reduce risk in their asset allocations or through pension risk transfer activities.”

The funded levels have been on a tear following the market crash in March 2020 when the COVID pandemic first hit. Since March 12, when the funded levels dipped just below 80%, the aggregate funded ratio for pension plans in the S&P/TSX Composite Index has risen by more than 21 percentage points.

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