Record 132% solvency shows why headline returns can mislead plan sponsors
Canadian defined benefit (DB) pension plans lost money in the third quarter, but the rise in bond yields behind those losses may have strengthened their funding, according to RBC Investor Services.
Plans in the firm’s custody posted a median return of -2.6% for the quarter ended Sept. 30, RBC reported Friday. That reverses a 6.0% gain in the second quarter and leaves plans up 4.5% year-to-date.
“A quarter like this one shows why headline returns can be misleading. Plan sponsors saw negative performance, but rising yields may have actually strengthened their funded position. That disconnect is driving a real shift in how they think about their portfolios,” said Isabelle Tremblay, director of client solutions and asset owner segment lead at RBC Investor Services.
Marsh’s Pension Health Pulse found the median solvency ratio of about 435 Canadian DB plans reached a record 132% on Sept. 30, up four percentage points from the second quarter. About 89% of plans were above the 100% fully funded mark, while roughly 11% remained in deficit.
The logic is arithmetic: pension liabilities are calculated by discounting future benefit payments, so higher long-term yields shrink their present value, Wealth Professional reported. RBC said the extent of the benefit depends on each plan’s liability profile.
Bonds drag, equities hold
Fixed income was the weak spot. Client plans returned -5.1% in the asset class, versus -3.0% for the FTSE Canada Universe Bond Index. Only 91-day Treasury bills (0.6%) and mortgage bonds (1.5%) posted gains. Long-term bonds fell furthest, with the FTSE Canada Long Overall Index down 6.3%, while short-term bonds returned -0.9%. The Government of Canada 10-year bond yield rose 61 basis points.
Equities were steadier. Client plans returned 1.2% in global equities, behind the MSCI World Index (CAD) at 1.9%. The S&P 500 Index (CAD) gained 2.4%, led by energy at 17.3% on elevated oil prices, while information technology, 39.7% of the index, returned 7.3%. The MSCI Europe Index (CAD) fell 1.6%.
In Canada, plans returned 1.6%, broadly tracking the TSX Composite Index. Information technology led sectors at 17.9%, followed by materials at 12.9%. Financials, the index’s largest weighting at 34.4%, fell 3.0%. Energy gained 3.3% but remains the top sector year-to-date at 27.7%.
Rate hike adds a new variable
The Bank of Canada held its policy rate at 2.25% through the quarter, then raised it to 2.5% on Wednesday, after the period closed. It was the first increase since July 2023, The Canadian Press reported.
Governor Tiff Macklem said cost pressures are building, mainly from the war in the Middle East. “With the outlook for inflation substantially higher and the economy showing resilience, an increase in the policy rate is needed to reduce the risk that elevated energy prices could spill over and become generalized inflation,” he said. “There could be a need to raise the policy rate further, but given the uncertainties, we will proceed carefully.”
The central bank forecasts inflation will reach 3.5% by year-end. Its next decision is Dec. 9.
Marsh said sponsors have room to act. “Plan sponsors can use this period of strength to review risk, consider de-risking options with an aim of reinforcing their funding policies’ position,” said Brad Duce, a principal at Marsh in Toronto. The report listed stress-testing portfolios, buying group annuities and revising surplus-use policies among the options, while stressing that fiduciary duties must stay central.
RBC also noted growing demand, led by smaller and mid-size plans, for investment managers to disclose more about private-markets exposures.
