Normandin Beaudry Pension Plan Financial Position Index, June 30, 2024

Click here for our index that tracks the Quebec municipal and university sector.

The average funded ratio and solvency ratio of pension plans improved slightly in Q2 2024.

As at June 30, 2024, the average pension plan funded ratio, excluding the effect of asset smoothing, is 126%. The ratio is up 2% in the second quarter and up 9% since the beginning of the year.

Note: The illustrated funded ratio excludes the effect of asset smoothing. A plan that uses this mechanism can therefore expect less significant change in its financial position.

The financial position improved slightly in Q2 2024, as the discount rates used to value pension plan liabilities increased marginally during the quarter. Investment performance was similar to expected returns and therefore had little impact on the financial position. Current service costs changed little in Q2 2024.

The average solvency ratio of pension plans as at June 30, 2024, is 114%. The ratio is up 1% in the second quarter and up 4% since the beginning of the year.

The slight improvement in the solvency financial position in Q2 2024 is mainly due to a decrease in pension plan actuarial liabilities as a result of higher discount rates.

On June 5, Canada became the first G7 country to cut its key interest rate, lowering it by 0.25% to 4.75%. This is the first cut since March 2020, and other central banks have followed suit, including the European Central Bank. On the bond markets, despite a general decline in interest rates following this announcement, long-term rates still rose slightly during the quarter. The Bank of Canada is cautious about the persistent risks of inflation above the 1-3% target. Bond markets are now anticipating fewer key rate cuts for the year than initially expected. The impact on the Canadian dollar will also need to be monitored, as this rate cut widens the gap with the U.S. Federal Reserve’s 5.5% rate, which remained unchanged in June.

Meanwhile, the frenzy in the main stock market indices in the first quarter has faded, with more modest returns in the second quarter. The technology, telecom and utilities sectors continued to deliver positive returns, generally speaking, but returns from other sectors were mostly negative.

After a difficult 2023 for real estate investments, when the higher interest rate environment reduced real estate valuations overall, some private real estate funds are showing stabilized returns since the start of 2024. As for infrastructure investments, most continued to generate returns in line with expectations.

In April, the Canadian Institute of Actuaries (CIA) published a new mortality improvement scale. The CIA’s study highlighted significant trends in longevity and suggests that life expectancy will increase at a faster rate than previously predicted. For pension plans, this would mean higher-than-expected costs. Although the CIA and the pension industry have not yet decided on the use of this new scale, pension plan administrators could anticipate the potential impacts in a number of ways:

• Add an additional margin to the discount rate to reflect the approximate increase in liabilities and current service cost associated with the new mortality improvement scale.
• Transfer longevity risk by purchasing an insured annuity contract.
• Obtain advice from the plan’s consultant on risk management best practices, taking into account the specific context of the plan.

The CIA is also working on updating Canadian mortality tables and expects to publish the results of this analysis by the end of the year.

• Average funded ratio: 126% as at June 30, 2024 / up 2% in the second quarter and up 9% since the beginning of the year
• Average solvency ratio: 114% as at June 30, 2024 / up 1% in the second quarter and up 4% since the beginning of the year
• Second-quarter performance similar to expectations based on discount rates
• Discount rate up slightly in the second quarter

Our expert mortality teams can analyze the longevity risk specific to your plan and propose appropriate measures for its funding. Want to learn more about developments surrounding the mortality assumption? Contact your Normandin Beaudry consultant or email us.

The Normandin Beaudry Pension Plan Financial Position Index is calculated by projecting the pension plan financial data of its Canadian clients, excluding plans in the Quebec municipal and university sector. A separate index is published for these pension plans. Assets are projected based on the performance of market indices. Liabilities projected on a going concern basis use an estimated discount rate based on each plan’s asset allocation and the sensitivity of asset classes to changes in interest rates on Government of Canada bonds. The discount rates used on a solvency basis are those prescribed by the Canadian Institute of Actuaries, and those for transfer values are therefore based on the previous month’s market interest rates.