'DB pension plans for Canadian workers appear to be generally sound'
Canadian defined benefit (DB) pension plans ended the year 2024 favourably, with improvements to funded positions during the fourth quarter, according to a report from Mercer.
Specifically, the Mercer Pension Health Pulse (MPHP) improved to 125 per cent of Dec 31, 2024, near the record high.
This is an improvement from its level of 122 per cent as of Sept. 30, 2024 and a significant lift from 116 per cent as at Dec. 31, 2023, according to the report.
The MPHP tracks the median solvency ratio of the defined benefit pension plans in Mercer’s pension database.
Also, 88 per cent of plans in Mercer’s database have a solvency ratio above 100 per cent, up from 87 per cent over the quarter and 83 per cent at the start of the year.
“Canadian DB pension plans ended the year at a near record high,” says Jared Mickall, principal and leader of Mercer’s Wealth practice in Winnipeg. “Asset performance was generally strong during the quarter and liabilities were either stable or slightly declined. From a solvency perspective, DB pension plans for Canadian workers appear to be generally sound.”
Workplace pension plans are a recruitment standout, according to a previous report.
Is pension plan review important?
Despite the positive developments in pension plans, Mercer calls on providers to conduct reviews of their plans.
In the final quarter of 2024, the Bank of Canada cut the overnight rate from 4.25 per cent to 3.75 per cent on Oct. 23, and to 3.25 per cent on Dec. 11. While the overnight rate declined during the quarter, interest rates at longer durations were either stable or slightly increased, according to Mercer.
“Due to the long-term nature of DB pension plans, stakeholders will be keen to monitor the movement of interest rates and credit spreads on Canadian bonds with longer maturities,” says Mercer.
Also, inflation in Canada continued its path of easing coming in at 1.9% in November. However, some components of inflation such as food and shelter continue to be elevated.
“Canadian DB pension plans with inflation-related benefits are advised to monitor inflation and how it may impact their obligations, both in the short-term and long-term,” says Mercer.
The possibility that the incoming US administration could impose tariffs on Canadian and other countries' exports to the United States will also have an impact on the Canadian economy, interest rates, inflation and markets are uncertain.
“Canadian DB pension plan sponsors and their members have made significant strides to improving their plans’ financial positions in recent years. As we enter an uncertain 2025, DB plans should make a New Year’s resolution to manage their financial positions for benefit security and contribution stability,” says Mickall.
“Appropriate governance, effective risk management, asset mix reviews with consideration for environmental, social, and governance factors, may help make that resolution become reality in 2025 - and despite the stormy seas ahead, help plans continue to deliver on the pension promise for their members.”
In mid-2024, Ottawa announced its intent to expand early pension eligibility for key frontline safety and security workers.
