Canadian pension plans recover as discount rates rise and investment returns outperform expectations
Despite financial market volatility in early 2025, Canadian pension plans showed recovery in the second quarter.
According to Normandin Beaudry’s June 30, update, both funded and solvency ratios improved nationally and in Quebec’s municipal and university sector.
The average funded ratio of Canadian pension plans outside Quebec rose to 130 percent, up 3 percent from the previous quarter and 1 percent year-to-date.
The average solvency ratio increased to 115 percent, rising 4 percent in the second quarter and 1 percent year-to-date.
The report attributes the improvements to higher-than-expected investment returns and increased discount rates.
For Quebec’s municipal and university pension plans, the average funded ratio for the prior component reached 109 percent, and 125 percent for the subsequent component.
These ratios increased by 1 percent and 2 percent respectively over the second quarter, while remaining stable year-to-date.
Solvency ratios also improved, with the prior component reaching 102 percent (up 3 percent in the quarter and 2 percent year-to-date) and the subsequent component reaching 110 percent (up 3 percent in the quarter and 1 percent year-to-date).
The market backdrop during this period included sharp fluctuations due to geopolitical instability and trade disputes.
The MSCI World Index fell 12 percent in Canadian dollar terms after “Liberation Day” on April 2 but rebounded when the US government reversed its tariff policy.
The US also announced an expansionary fiscal policy that is expected to increase its budget deficit and debt ceiling.
Interest rates played a key role in the financial outlook.
The Bank of Canada held its key rate at 2.75 percent, continuing a pause that followed seven rate cuts throughout 2024 and early 2025.
In contrast, the US Federal Reserve maintained its key rate between 4.25 percent and 4.50 percent. This sustained a high cost of hedging against US dollar fluctuations.
Long-term bond yields rose slightly, resulting in lower bond returns, influenced partly by inflation estimates adjusted for the removal of Canada’s carbon tax.
In the US, the “One Big Beautiful Bill Act” initially included a clause taxing investors from so-called “discriminatory foreign countries,” a move presumed to target Canada.
However, the final version adopted on July 1 excluded this provision, avoiding consequences for Canadian pension funds.
Normandin Beaudry highlighted that the recent volatility underscores the importance of a robust governance framework.
Guideline No. 10 from the Canadian Association of Pension Supervisory Authorities (CAPSA), issued in September 2024, recommends that plan administrators adopt structured approaches for managing risks, including those related to ESG and cybersecurity.
Administrators have started reviewing their practices to align with this guidance.
Both versions of the index—national and Quebec-specific—are based on projections from Normandin Beaudry’s client plans.
The going concern liability calculations use discount rates based on each plan’s asset mix and sensitivity to Government of Canada bond rates.
Solvency discount rates follow guidance from the Canadian Institute of Actuaries, using market interest rates from the previous month.
