Mercer's Jared Mickall explains why benchmarking shouldn't be limited to asset performance alone
The second quarter of 2025 kicked off with a jolt for plan administrators, as noted in Mercer’s recent Pension Health Pulse (MPHP). But by the end of June, the outlook among pension funds had shifted sharply.
Jared Mickall, principal and wealth practice leader at Mercer explained the MPHP, which tracks the median solvency ratio across 471 defined benefit (DB) plans, initially dipped from 122 per cent on March 31 to 121 per cent at the end of April.
He noted it was even enough to make actuaries uneasy.
“At the very start of the second quarter, it was starting to look pretty bleak,” he said. “Many were a bit concerned about monitoring what was going on in the markets and is this trend going to continue?”
However, equity markets found their footing, and by the end of June, solvency had rebounded to 126 per cent. Mickall said the combination of improved equity performance and a modest uptick in mid-to-long-term bond yields, which brought down liabilities, was key.
That improvement underscores an important tension in DB plan management: asset performance versus solvency.
But Mickall underscored that when evaluating DB plans, benchmarking shouldn’t be limited to asset performance alone. While many sponsors compare the returns of their Canadian or US equity managers to market indices, a practice he described as “fiduciary, good governance items to be monitoring”, he stressed that liabilities must also be part of the equation.
He pointed to a common misconception. When interest rates rise, fixed income assets may fall in value, potentially dragging on returns. But in DB plans, that liability-side benefit - lower future obligations - can be more significant than the hit to asset values. Notably as many sponsors are now aligning fixed income portfolios with their liabilities to neutralize that risk.
Mickall noted this alignment is a critical but often overlooked nuance when evaluating performance. Particularly as rising interest rates in the last quarter reduced liabilities but also decreased the value of some fixed income assets. That dual impact can appear negative at first glance, but Mickall explained why it’s not so straightforward.
“You may say, ‘Well, hold on, isn’t that a bad thing, that we lost money on fixed income assets?’ Yes, but the idea being, in a defined benefit program, it’s a bit more complicated,” he said, noting that many sponsors intentionally align part of their portfolios with the long-term liability profile of their plans.
So how should a pension plan’s success be measured? Mickall acknowledged while there’s several ways to measure, a solvency ratio is just one part of the puzzle.
“It’s a measure, but it’s not the only measure,” he said. “I would suggest that it depends on the nature of the plan and the sponsor of the plan.”
For closed, privately sponsored DB plans, solvency is a key indicator. In those cases, Mickall noted, the plan’s strength relies primarily on two things: the funds already in the trust and the financial health of the sponsoring employer.
But he cautioned against applying solvency analysis uniformly across all plan types. Public sector and jointly sponsored plans, for example, are typically ongoing and much larger in scale and may find more value in tracking long-term “going concern” metrics instead. For these entities, solvency is more of a reference point than a critical benchmark, Mickall noted.
“Many plans in the public sector might be more reliant on a going-concern type of longer-term metric. They’re more interested in trying to manage that just because they've got a different type of structure for their long-term nature,” he explained. “For them, solvency might be an interesting reference point, but what might be more notable for them is also the going concern nature of the plan as well.”
Still, Mickall acknowledged that solvency remains useful because it provides a clear, mark-to-market snapshot of assets versus liabilities at a given moment.
He pointed out that many DB plans hold long-term and universe bonds precisely because their cash flows mimic the monthly pension payments made to retirees. This approach helps mitigate volatility and allows for more targeted risk management, even if asset values fluctuate.
Whereas defined contribution (DC) plans operate differently from defined benefit plans in one fundamental way – they’re always fully funded. Because of this structure, the onus is largely on the member to stay informed and actively monitor their investments.
That’s why Mickall urged DC plan sponsors to encourage participants to regularly review their account performance, understand the mix between equities and fixed income, and evaluate any fees being charged.
Beyond asset mix, Mickall stressed that effective risk management is what separates reactive plans from those that maintain long-term financial health. Sponsors are increasingly assessing exposure not only to market fluctuations but also to longevity, interest rate shifts, salary inflation, and liability sensitivity.
While both active and passive management can play a role in mitigating financial risks, he suggests the bigger picture is understanding all the risks that could impact the plan’s funding and day-to-day operations.
He outlined a broader set of challenges, pointing to interest rate shifts, inflation exposure, longevity risk, and even operational vulnerabilities like cyber threats or postal disruptions.
“Pension plans deal with highly sensitive data,” he said, noting that cybersecurity has become a non-negotiable component of governance.
That’s why plans need to continually reassess these risks, he added, cautioning against complacency. Inflation hedging, for instance, has been complicated by Canada’s decision to stop issuing new real return bonds. That shift underscores the need for plans to revisit their strategies regularly as Mickall stressed that plans must “periodically reassess your plan, reassess what’s been done.”
“What am I also willing to take as a risk today versus what I was willing to take four or five years ago?” he said.
Ultimately, Mickall said that most plan members trust that their pensions are being managed effectively, sometimes without much scrutiny. But he encouraged them to stay informed.
“Hopefully, [members] can sleep at night knowing that these plans are having a lot of risk management,” he said.
