AI-fuelled equity returns and falling liabilities have lifted plan positions, but Normandin Beaudry experts say the same forces could cut both ways
Recent findings from Normandin Beaudry’s Pension Plan Financial Index found that Canadian defined benefit (DB) pension plans continued to strengthen through the third quarter of 2026, but experts from the consultancy firm suggest the drivers behind that improvement are shifting in ways that demand attention from plan sponsors.
Claude St-Laurent, senior principal, pension and investment consulting at Normandin Beaudry in Montreal, said DB pension plan financial positions have continued to climb since the start of the year, though the factors behind that improvement have not stayed the same. Earlier in 2026, asset returns - particularly equity gains - did the heavy lifting.
By the third quarter, the momentum came from a different source - falling liabilities driven by interest rate movement.
“Whereas it was more asset return driven in the first 2 quarters, especially the second quarter, the third one was not as strong on the equity return but there’s still continued improvement based on more of the decrease in liabilities,” noted St-Laurent, adding quarter to quarter, the mix of forces pushing the index can shift, but the broader trajectory has held steady.
“Since the end of 2022 at least, it’s just continuing that streak of improvement that we’re seeing in the index from that perspective,” he added.
Shifting drivers behind DB pension plan improvement
According to Normandin Beaudry, the third quarter of 2026 played out against a backdrop of persistent inflation and rising interest rates. Inflation weighed on consumption costs, while higher rates pushed up the price of financing while the Middle East conflict added fuel, particularly through its effect on energy prices.
Additionally, large technology companies issued significant volumes of debt to fund AI infrastructure and data centre buildouts, adding further upward pressure on rates.
South of the border, the relationship between monetary and fiscal policy grew more tangled as the US Federal Reserve raised its benchmark rate by 25 basis points on September 16 to counter a fresh wave of inflationary pressure. Meanwhile, the US Treasury stepped up its purchases of longer-term bonds to support liquidity and contain long-term borrowing costs.
Whether that intervention will move the needle on long-term rates remains an open question, the firm said in a statement, noting some observers warn it could work against inflation-control efforts.
Rising rates and what they mean for plan health
St-Laurent placed the recent rate environment in a broader historical frame. Interest rates spent decades falling from their peaks in the 1980s, bottoming out around 2021 when some countries even dipped into negative territory. The sharp increase in 2022 restored rates to something closer to normal levels, and since then the shifts have been minor, he said.
While the slight uptick noted in the most recent quarter was enough to give pension plan financial positions an incremental boost, St-Laurent underscored how it shouldn’t be mistaken for a significant rate event. Pension plan liabilities are sensitive to even small movements, which can create a misleading impression of dramatic change when viewed in isolation.
“Sometimes just kind of putting things in perspective with respect to the history sometimes helps to not overly emphasize or underly emphasize in what’s going on in the markets,” he said.
When rising rates stop helping pension plans
For Jesse Chrumka, senior principal, investment consulting at Normandin Beaudry in Montreal, the notion of rising rates helping pension plans rests on two assumptions that don’t always hold. The first is that most plans have not fully hedged their liabilities, meaning rate increases close the gap in their favour, whereas the second is that other asset classes haven’t been punished by those same rate increases as severely as the fixed income side.
If either condition breaks down, the math changes. He flagged the AI-driven equity rally as a force that’s obscured weakness elsewhere in portfolios.
“The overall AI theme, I think, has papered over a lot of softness,” he said. “Interest rate increases, which are often tied to inflation concerns, can really hurt stocks and real estate and a lot of things that plans are invested in. Whether it's the rate increases themselves or everything going on around them that causes the need for rate increases, these are all sources of risk that can hurt quite a bit. But it has to hurt more than your decrease in liabilities, so that's one of the things that [the idea of interest rate increases hurting more than helping] has to be predicated on,” explained Chrumka.
As to whether rising rates can hurt plans, St-Laurent emphasized how from a purely mechanical standpoint, they can’t because in practice, no plan is over hedged on its liabilities, he said, adding plan sponsors are either fully hedged or underhedged.
That means any rate increase will, by definition, reduce the present value of liabilities and improve a plan’s financial position, St-Laurent noted.
The risk, he said, is indirect, emphasizing that if rates climb too fast for the economy to absorb, the cost of financing rises across the board. Corporate investment projects face a higher profitability threshold, activity slows, and the conditions for recession build.
He drew a contrast with the high-rate environment of the 1980s, when rates above 10 percent existed outside of a recessionary context and pension costs were far lower than they are today.
“When you're funding a pension, if you're in an environment where every dollar that you invest returns a lot more in the future, you don't need to put as much money aside for retirement because you can just let your money grow on its own,” explained St-Laurent. “When you're in an environment where interest rates are low, that means your perspectives of investment returns for the future are lower. You have to compensate by putting more money aside in your pension plan to be able to provide the same pension promise. If there's no shock, rise of interest rates is good. If rise of interest rate creates shocks and creates recession, you can have short-term negative impacts indirectly.”
Strong funding meets the complacency question
While real-world uncertainty has spilled into markets, Canadian equity returns have been strong and liabilities have dropped. The result, Chrumka suggests, is a funding environment that looks healthy on paper even as risk narratives pile up.
While he acknowledged that sponsor complacency during surplus periods is a real risk, he suggests the current moment is asymmetrical compared to past surplus periods. According to Chrumka, sponsors aren’t simply riding a long stretch of favourable conditions they have grown accustomed to because they’re looking at strong funded positions against a backdrop of identifiable and serious threats, pointing to a potential stock market correction if the AI-driven rally loses steam, persistent geopolitical risk, inflation, and even longevity risk on the liability side.
“There are all these themes you could point at and say, there’s risks here and there. But at the same time, as our index demonstrates, a lot of pension plans are in really, really good situations right now,” he said, adding that disconnect makes the current moment hard to ignore for sponsors weighing their next move, particularly when it comes to de-risking.
“This idea of taking the opportunity to de-risk, I think there hasn’t been such a clear case for it in years,” he added.
