For pension plans, the returns are there, but interest rates are blowing hot and cold.
The Mercer Pension Financial Health Index, which tracks the median solvency rating of defined benefit pension plans (DBPs) included in the firm’s database, stood at 101% as of September 30 , up slightly from 100% on June 30.
But in more detail, in this universe, 53% of the plans have an asset surplus according to the solvency approach, 31% show a degree of solvency between 90% and 100%, 11% between 80% and 90% and 5 % under 80%.
Solvency liabilities
The consulting firm Aon calculates for its part that the overall capitalization ratio of Canadian pension plans associated with the S & P / TSX composite index fell from 95.9% in June to 96.8% in September. Yields were ultimately nil in the third quarter as a small gain in the equities segment was offset by lower yields on fixed income.
For an RPD, however, the rise in bond rates came to reduce what is called the solvency liability, the interest rate used to discount pension commitments having fallen from 2.92% to 3.06%.
According to RBC Investor and Treasury Services analysis, RPDs returned 0.6% in the third quarter, bringing the cumulative annual return to 4.5%. The Canadian equity category posted a modest quarterly return of 1.5%, but posted a nine-month cumulative 18.3% supported by the 41% surge in the Energy component. For their part, fixed income securities posted a loss of 0.8% for the third quarter, 5.7% over nine months.
“Markets have become volatile again due to global fears surrounding the impact of labor shortages, pressures on supply chains and rising consumer prices,” said RBC.
“Central banks are already moving away from some of the ultra-accommodative monetary policies as inflationary pressures persist. In response, plan managers are investing more and more in a wider variety of categories of securities, including private placements, real estate funds, infrastructure funds that offer protection against inflation. “
On the stock market, these inflationary pressures favored so-called value stocks, with a gain of 25.3% after nine months this year according to Bloomberg, as opposed to so-called growth ones (+ 10.3%).
They were ahead of the components Energy (+ 40.9%), Real estate (+ 25.8%), Finance (+ 24.8%), Communication services and Information technology (+ around 20%) and Consumer goods. (+ 13.5%).
On the bond side, the return after nine months fluctuates between -4% and -8.9%.
Pressure on rates
Inflation and upward pressure on interest rates should continue to make up the menu and fuel price volatility. In the United States, bond market participants are now more nervous and are banking on the continued inflationary pace to stay above Federal Reserve targets, Oxford Economics tells us.
They see two policy rate hikes of 25 basis points each in 2022, with the first expected in July, and a faster cut in quantitative easing.
In Canada, National Bank analysts believe that the target for the overnight rate, currently at 0.25%, will begin to rise in the spring to end 2022 at 1.25%, to 1.75% at the end of 2023.