Canadian pension funds had a good year in 2020. The aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index increased from 90.8 % to 91.2% during the past 12 months, according to the Aon Pension Risk Tracker.
- The funded status deficit decreased only slightly, by $0.2 billion, which was driven by asset increases of $18.7 billion, offset by liability increases of $18.5 billion year to date.
- Pension assets returned 9.9% over 2020 and were positive in Q4, ending the quarter up 3.9%.
- The year-end long-term Government of Canada bond yield dropped 55 basis points (bps) relative to the last year-end rate, and credit spreads widened by 13 bps. This combination resulted in a decrease in the interest rates used to value pension liabilities from 2.92% to 2.50%. Given a majority of the plans in Canada are still exposed to interest rate risk, the increase in pension liability caused by decreasing interest rates offset the positive effect of asset returns on the funded status of the plan.
“After a wild ride throughout the year – funded status cratered in late March, to almost 80% – Canadian pension plans ended 2020 in a similar, if slightly better, funded position compared to how they started the year,” said Nathan LaPierre, Partner, Retirement Solutions, Aon. “Plan sponsors who are in de-risking mode should redouble their efforts to lock in improved funded positions, while those with ongoing DB plans will need to grapple with lower return expectations stemming from ultra-low interest rates.”