The health of Canadian pension plans improved to its best level in more than a decade in the fourth quarter of 2013 due to strong stock markets and rising long-term interest rates, consulting firm Mercer said Thursday.
The Mercer pension health index, which tracks the funded status of a hypothetical defined benefit pension plan, stood at 106 per cent at Dec. 31 — its highest level since June 2001.
The index started the year at 82 per cent and stood at 98 per cent at Sept. 30.
“It’s hard to overstate how good 2013 was for most defined benefit pension plans,” said Manuel Monteiro, a partner in Mercer’s financial strategy group.
“Stock markets soared, long-term interest rates rose sharply, and the Canadian dollar weakened, which further magnified foreign returns.”
The firm estimated that almost 40 per cent of pension plans were fully funded at the end of 2013, compared with six per cent at the beginning of the year.
The assessment by Mercer came as a quarterly survey by insurance and consulting firm Aon Hewitt suggested the average solvency funded ratio of defined benefit pension plans increased to 93.4 per cent.
Aon Hewitt said the ratio, based on more than 275 plans, was 24.8 percentage points higher than a year ago.
“Last year saw a remarkable turnaround and we ended with the highest median solvency ratio in six years,” said Will da Silva, senior partner in Aon Hewitt’s retirement practice.
The firm said roughly 26 per cent of the plans surveyed were more than fully funded at the end of the fourth quarter, compared with three per cent at the end of 2012.
Long-term Government of Canada bond yields, a key factor in calculating the liabilities of pension plans, ended the year at 3.2 per cent, up from 2.3 per cent at the beginning of the year.
Mercer estimated that a one percentage point increase in long-term interest rates would reduce the liabilities of most pension plans by 10 per cent to 15 per cent.
Under a defined benefit pension, a plan pays a promised amount to retirees, while under a defined contribution plan, a member receives a set amount that they then invest to pay for their retirement.
The health of defined benefit pension plans has been a key issue for many of Canada’s largest corporate names as record low interest rates have driven up the liabilities of plans and forced companies to make large contributions.
The rising costs have helped defined contribution pension plans gain in popularity as their costs for companies are more predictable than a defined benefit plan and not susceptible to swings in interest rates or the stock market.