April 2023
Normandin Beaudry Pension Plan Financial Position Index, March 31, 2023
Click here for our index which tracks the Quebec municipal and university sector.
After a quarter marred by market and interest rate volatility, the average pension plan funded ratio at the end of Q1 2023 remained consistent with that as at December 31, 2022.
The average pension plan funded ratio, adjusted to exclude the effect of asset smoothing, is 120% as at March 31, 2023, up 1% over the quarter.
The main factor in the improving financial position in Q1 2023 was the strong performance of financial markets. This decline was partially offset by a slight increase in value of pension plan liabilities. In fact, pension plan liabilities are calculated based on lower discount rates given the decline in interest rates on bonds since their peak at year-end 2022.
The decrease in discount rates has also brought up current service costs. However, the variation in current service costs will only be reflected at the next actuarial valuation. Furthermore, the impact on contributions required will depend on contribution stability mechanisms in place, where applicable.
The average solvency ratio as at March 31, 2023 is 111%, up 4% over Q1 2023.
This increase is mainly due to the financial markets’ strong performance. Despite the drop in interest rates over the quarter, discount rates on a solvency basis, which are determined according to applicable actuarial standards of practice, remained relatively stable.
The performance of key financial markets was generally positive in Q1 2023. Central banks have repeatedly increased their policy rates since the beginning of 2022 to stop runaway inflation, at the risk of causing a recession in the process. Economic data for the start of the year 2023 was therefore welcome news for financial markets, as inflation is quickly slowing down, company profits are stable and unemployment remains low.
However, key financial market returns were volatile, with a large part of the initial optimism erased in mid quarter. Three regional American banks went bankrupt after a run on deposits. European bank Credit Suisse, one of the world’s top 30 banks considered too big to fail, was acquired by UBS for about 40% of what it was worth the previous week. These events shook the markets and served as a reminder to investors that the repercussions of rapid hikes in central bank policy rates have yet to be fully felt.
Interest rates have dropped since the start of the quarter and the yield curve remains inverted, signalling that financial markets anticipate cuts to central bank policy rates soon. Slowing inflation and the risk of an impending recession are strong indicators of that scenario; however, if the 1970s taught us anything, it’s that inflation could persist if central banks are too eager in loosening their monetary policy.
In this period of uncertainty and volatility, disciplined risk management and a diversified investment approach remain the best defence. Pension plans seeking opportunities to reduce their investment risk are certainly active in the current circumstances. First, despite the recent decline in interest rates, the yield to maturity of fixed income securities remains attractive. Second, private market investments are gaining traction as core and opportunistic investments proved to be resilient throughout the pandemic and especially in 2022, when public markets were bearish.
- Average funded ratio: 120% as at March 31, 2023 / up 1% over the quarter
- Average solvency ratio: 111% as at March 31, 2023 / up 4% over the quarter
- Positive returns over the quarter for key financial markets
- Decrease in discount rates on a going concern basis over the quarter, which increases the value of liabilities and current service costs
If you have any questions, 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.