Increased bond yield and widened credit spreads contribute to increase in DB funded status
The aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index increased from 101.7 percent to 105.4 percent over the last three months, according to the Aon Pension Risk Tracker.
The Tracker shows pension assets lost five percent over the third quarter of 2023, this compares to a gain of 12 percent in the prior three months. The long-term Government of Canada bond yield increased 77 basis points (bps) during the quarter and credit spreads widened by two bps. This combination resulted in an increase in the interest rates used to value pension liabilities from 4.62 percent to 5.41 percent.
“Although pension assets experienced negative returns over the quarter, yields have continued to increase which lowered liabilities and increased funded positions amid volatility,” says Nathan LaPierre, partner, wealth solutions, Aon. “The continued upward trend of pension plan funded positions will likely lead to further de-risking opportunities, including increased interest in liability-driven investment solutions and annuity buy-in and buy-outs.”
The Aon Pension Risk Tracker calculates the aggregate funded position on an accounting basis for companies in the S&P/TSX Composite Index with defined benefit (DB) plans. The tool uses Aon’s risk analyzer platform, which allows plan sponsors to track their individual plan’s funded status daily to help better decisions. Versions of the pension tracker are also available for the S&P 500 in the U.S. and for other indices in the UK.