Marsh’s Pension Health Pulse shows median solvency at 132 per cent, but sponsors face tough calls on surplus and de-risking
Canadian defined benefit pension plans have never been in better financial shape - at least on paper.
Marsh’s (formerly Mercer) latest Pension Health Pulse Q3 2026 report found the median solvency ratio climbed to an all-time high of 132 per cent, fuelled by a 4 per cent jump in the quarter. The question now facing plan sponsors is whether they can hold onto those gains.
"The combination of those two things are generally really good for the funded positions of pension plans," said Brad Duce, principal at Toronto-based Marsh, pointing to rising interest rates and resilient equity markets as the twin drivers. "We weren’t shocked to see that plans’ positions have continued to improve because those are the two main drivers of the health of the funding of pension plans."
Why higher bond yields shrink pension liabilities
Duce noted that the rising interest rate environment has pushed down solvency liabilities, which in turn has strengthened plan funding positions. While equity markets have been more volatile in the most recent quarter, he acknowledged, he believes they remain elevated enough to continue supporting pension plan financial health.
Duce explained that pension plan liabilities are essentially promises to pay members in the future, reported as a present value using a discount rate. As bond yields have climbed broadly, the discount rates used to measure those obligations have risen with them, shrinking liabilities in today’s dollars.
"Pension plans see their liabilities and those payments that they have to pay in the future become cheaper," he said, pointing to a dual effect at work. Existing funded positions strengthen because plans need less capital now to cover accrued obligations.
"The cost to provide additional defined benefit pensions becomes cheaper as well when interest rates rise. When you’re calculating what that present value is, you need to use a discount rate to sort of bring those future payments into today’s terms," Duce explained.
Duce highlighted the divergence between the Bank of Canada’s policy rate, which has held at 2.25 per cent for four consecutive quarters, and longer-dated government bond yields now at levels not seen since 2023, as a prime example.
"It’s the market rates that drive how pension plan liabilities are measured. It’s that measurement that really matters more so than necessarily the decisions that the bank makes on a sort of maybe more shorter-term basis," he said.
Structural barriers keep plans below full funding
Still, 11 per cent of plans remain in deficit. Duce identified several structural factors that keep those plans stuck, noting some are designated plans under the Income Tax Act, which caps employer contributions and creates what he called "a persistent shortfall". Others have de-risked so aggressively that they missed the upside from rising equity markets and higher rates entirely by design.
"In those situations, the plan sponsors have made a decision that they’re comfortable with the funded position of the plan as it is and don’t want to take additional risk in case it gets worse," he noted.
For well-funded plans, de-risking activity has accelerated since 2024, Duce noted, with annuity purchases leading the way. Plan sponsors have also been transferring liabilities off their books at a steady pace, and the group annuity market has had no trouble absorbing that demand. Pricing has remained competitive, and sponsors with modest surplus have been willing to spend some of it to reduce overall plan risk.
Beyond annuities, many well-funded plans have shifted toward higher fixed income allocations, while infrastructure has also gained traction as an alternative to publicly traded equities.
"Those investments tend to have a long-term investment horizon, much like the long-term promises to pay pensions," Duce said.
Plan sponsors are also looking at the benefit side, using their funding buffer to provide inflation or benefit increases to pensioners, while still ensuring the plan wouldn’t fall back into deficit if markets turned, he added.
Surplus strategy gets harder as plans hit contribution limits
Yet, the surplus question itself is growing more complicated, Duce acknowledged, noting a growing number of plans are bumping against the excess surplus limit - the threshold at which employer contributions must stop. He underscored the governance headaches this creates, particularly for plans with member contributions.
To that end, he emphasized sponsors should first get a clear picture of their downside exposure - both investment risk and interest rate risk - before making decisions about surplus deployment. For closed plans no longer accepting new members, surplus may be large enough to fund contribution holidays.
But he also cautioned that sponsors who take those holidays tend to assume they will last indefinitely. He stressed the importance of recognizing that benefit costs don’t disappear and that contributions may need to resume once surplus is drawn down.
"Oftentimes, when organizations take those contribution holidays, they expect them to continue into the future," he said.
Geopolitical shocks, inflation threaten funding gains
Ultimately, Duce believes AI-related shocks and geopolitical disruption are the primary threats to current funding levels, noting that both featured prominently in Marsh’s recent Global Asset Barometer report.
Either risk could destabilize financial markets and create problems on both the investment and interest rate sides, said Duce, emphasizing the two variables that matter most to pension plan health.
He believes sponsors should be stress testing against downside scenarios involving one or both of those forces. He also flagged inflation as a secondary but real concern, particularly for plans that automatically index benefits.
"There's a number of plans that do automatically provide inflation protection, and a rise in inflation can cause or can increase the pension liabilities as well so that could maybe be a slightly lesser risk that plan sponsors want to be aware of and test their sensitivity to," he said.
