Solvency hits 126% as 59% of Canadian DB plans now exceed 120%, according to Mercer Q2 update
Canadian defined benefit (DB) pension plans closed the second quarter with a median solvency ratio of 126 percent, according to the Mercer Pension Health Pulse (MPHP).
The solvency ratio began the quarter at 122 percent, dipped to 121 percent in April, recovered to 123 percent in May, and rose to 126 percent by June 30.
Mercer defines this ratio as a key measure of a plan’s financial health, tracking the ratio of solvency assets to solvency liabilities across 471 pension plans in its national database.
According to Mercer, 59 percent of DB plans in its database had solvency ratios above 120 percent by the end of the quarter, up from 53 percent at the start.
The proportion of plans with solvency above 100 percent also inched up, from 88 percent to 89 percent.
Positive equity returns largely drove the quarterly gains, as per the MPHP, although they were partially offset by negative returns on Canadian fixed income.
Liabilities declined over the quarter, contributing to the overall solvency improvement. Plans employing fixed income leverage may have maintained or improved their ratios through the period.
Jared Mickall, principal and wealth practice leader at Mercer in Winnipeg, said the overall financial health of DB pension plans for Canadian workers “continues to be generally secure.”
He noted that “there was an initial decline in April, which then improved during May and June.” While equities were volatile throughout the quarter, they ended strongly.
He also explained that rising fixed income yields led to a general decline in both liabilities and fixed income assets.
As reported by Mercer, the second quarter unfolded alongside persistent tariffs, international conflicts, the removal of the federal consumer carbon tax, and a Canadian election.
Despite this backdrop, DB plans showed continued resilience.
Inflation continued to ease during the same period.
According to the Bank of Canada, inflation fell from 2.6 percent in February to 2.3 percent in March, and reached 1.7 percent by April, holding steady through May—within the central bank’s target range.
Since March 12, the Bank has maintained the overnight rate at 2.75 percent, while interest rates for longer durations have increased.
Mercer stated that sponsors should continue monitoring shifts in interest rates and credit spreads, particularly in Canadian bonds with longer maturities.
They also noted that inflation’s impact on plan obligations, both short- and long-term, remains a key consideration.
Mickall added that good governance of DB plans should involve reviewing recent market stresses “to gain insight on how the plans behaved and how to plan for potential adverse events.”
As per Mercer, the MPHP projections incorporate each plan’s most recent actuarial valuation, factoring in benefit accruals, pension payments, interest rate changes, expected investment returns based on the plan’s target mix, and employer or employee contributions.
The database spans pension plans from public, private, and not-for-profit sectors across the country.
