DB plan surpluses demand governance, not improvisation, says Normandin Beaudry’s Claude St-Laurent and Isabelle Clément
While Canadian defined benefit (DB) pension plans remain in strong financial shape heading into the second half of 2026, the level of surplus positions is raising questions about governance, risk management, and whether plan sponsors have a formal funding policy in place.
According to Normandin Beaudry's latest pension index, the average going concern funded position sits at 132 per cent as of June 30. Solvency ratios climbed roughly 3 per cent since the start of the year. Meanwhile, equity markets, driven largely by AI-related hardware stocks, continue to deliver.
“From an absolute perspective, it's very good. Risk is there in the background and it’s something to keep in mind when looking forward and when administering a plan to make sure the strategy that was put in place is continued, making sure that things are followed rigorously according to plan,” said Claude St-Laurent, senior principal, pension and investment consulting at Normandin Beaudry. “But there’s no marking effects that has been seen in the last few quarters, nor in the last few years.”
On top of risk, St-Laurent flags a psychological challenge facing plan administrators.
"There's a lot of FOMO going on," he said. “When looking at investment return reports, for example, and you're seeing very strong returns, but at the same time retracted values with respect to market indexes or maybe comparing to peers or other plans who did better, there's a lot of questioning of strategies in place and that's healthy to do. But at the same time, it's also important to have a long-term perspective in the way that all that is dealt with.”
That's where formal governance documents come in. St-Laurent argues that written funding policies, investment beliefs, and strategy statements serve as anchors during periods of market turbulence or competitive pressure.
"All those kinds of mechanisms can bring people back to the predefined objectives when it comes time to make a decision, ensuring there’s continuity," he said.
The importance of having a formal funding policy
When asked to clarify what formal funding policies are and why they’re important for plan sponsors, St-Laurent thought it was important to first trace the evolution of formal funding policies in Canada.
According to St-Laurent, two decades ago, they were largely the domain of larger, more sophisticated plans with established governance structures. But that changed about 10 years ago when Quebec legislators required all plans in the province, regardless of size, to adopt one.
Meanwhile, outside Quebec, plans registered in Ontario or federally, no equivalent mandate exists. However, CAPSA has published a guideline that applies to pension plans in all provinces strongly encouraging the adoption of a formal funding policy.
According to St-Laurent, the Quebec model has three core components. The first is establishing clear objectives, everything from, whether the plan is trying to favour long-term growth, protect funded status, or stabilize contribution volatility.
Choosing a primary objective narrows the range of appropriate strategies and, more importantly, St-Laurent suggests, prevents committees from cherry-picking whichever goal suits the moment. The act of committing objectives to paper carries enormous practical value, said St-Laurent. Plans that drafted these documents a decade ago, particularly to satisfy a regulatory box, are now finding them indispensable when surplus-related decisions arise.
The second component is a defined set of mechanisms and strategies, functioning as a checklist that forces administrators to consider their full range of options before acting.
The third, and in St-Laurent's view no less significant, is who owns the document. Unlike most plan administration documents, which are written by pension committees, Quebec's funding policies are established by the plan sponsor, but usually involves agreement with employee representatives when plans are part of the bargaining agreement.
In jointly governed plans, that means union leaders and employers negotiate the policy together before administrators apply it. St-Laurent says that dynamic has introduced a valuable layer of accountability and produced some notable governance outcomes worth replicating in other jurisdictions.
Plan sponsors continue to have deficit 'PTSD'
Meanwhile, Isabelle Clément, partner, pensions at Normandin Beaudry acknowledged the dominant concern among plan sponsors and employee representatives in respective barganing groups right now is not knowing what to do with the existing surpluses.
"There's a slight PTSD from the deficit years and I think there's a general thought process around finding the right balance between protecting the surplus and gaining access to it," she said.
“We've learned lessons from the past in terms of making sure surplus is used prudently. There’s a general intention to use surplus responsibly and to avoid returning to the deficit years. Changes in legislated funding requirements contributed to this prudence. The funding policy is a great way to document and not to improvise around the current financial situation of pension plan,” Clément said, highlighting that CAPSA's newer guideline on pension risk management frameworks dovetails with this, giving plans a broader structure for thinking about funding risk alongside their governance documents.
This ties directly to the case for formal funding policies. If a plan defined its objectives during a period of deficit and the landscape has shifted to surplus, a more prudent approach tends to be applied to surplus management.
Still, the surplus conversation carries two distinct risks. The first is allocation risk, particularly in how surplus decisions affect equity among plan members. The second is the risk of using too much surplus, which can result in an unfavourable funded position if a subsequent market downturn arises. Both risks remain top of mind for the parties responsible for plan funding.
Should DB plan sponsors de-risk before spending surplus?
The surplus environment is also reopening the de-risking debate. For mature plans, Clément suggests the question is whether a large enough cushion removes the pressure to shift toward more conservative asset allocations or whether this surplus should be protected further through increased de-risking.
On the practical side, several options exist. They can leave the surplus in place, take contribution holidays where legislation and plan text permit, negotiate plan improvements, or in certain jurisdictions, withdraw surplus directly from the plan, particularly where modeling and projections suggest the surplus will compound on itself faster than contribution holidays can draw it down.
Still, Clément cautions that every one of those options should be handled with sufficient caution, to maintain favorable financial positions keeping in mind the fiduciary duty of plan administrators to deliver on the pension promise.
While the tools and the analytical rigour available today are far better than what existed 30 years ago, she emphasized that doesn't eliminate the need for discipline. Any surplus use should happen within a risk management framework, rather than an ad hoc reaction to a favorable funding snapshot.
Before spending down surpluses, St-Laurent argues there are two preliminary steps worth considering.
The first is making sure that liabilities are valued conservatively, including appropriate assumptions and margin for adverse deviations. That can effectively absorb part of the surplus on paper that can leave the plan, a way of building in a larger buffer.
The second, he suggests, is revisiting the investment policy. Whereas derisking the investment policy came with additional costs when plans were in deficit, this investment strategy can be implemented without affecting the plan’s cost in today’s surplus environment.
According to St-Laurent, the current interest rate environment makes that question particularly timely. He noted in 2020, with rates near historic lows, shifting from equities to bonds meant accepting a steep performance gap. That trade-off has narrowed considerably since rates climbed from the end of 2022 and have since held at relatively elevated levels.
"You're still rewarded for taking risk, but not as much," he said. "It could be a very interesting time to be thinking of de-risking before getting to that irreversible stage of using surpluses," he said.
