Canadian defined benefit pension plans end 2024 on a high note 

Toronto, January 2, 2025

Mercer, a business of Marsh McLennan (NYSE: MMC) and a global leader in helping clients realize their investment objectives, shape the future of work and enhance health and retirement outcomes for their people, today shares that despite the uncertainty with which Canada is entering 2025, the overall financial health of Canadian defined benefit (DB) plans ended the year favourably, with improvements to funded positions during the fourth quarter of 2024. The Mercer Pension Health Pulse (MPHP), a measure that tracks the median solvency ratio of the defined benefit pension plans in Mercer’s pension database, improved to 125% at December 31, 2024, near the record high. This is an improvement from its level of 122% as at September 30, 2024 and a significant lift from its level of 116% as at December 31, 2023. The solvency ratio is one measure of the financial health of a pension plan. 

Throughout the fourth quarter of 2024, pension plans saw positive returns across major asset classes and stable or decreased liabilities. These trends resulted in a meaningful improvement in solvency ratios. DB pension plans that used fixed income leverage may have experienced stable or improved solvency ratios over the quarter.

Additionally, 88% of plans in Mercer’s database have a solvency ratio above 100%, which is a slight improvement over the quarter from 87% and a significant improvement from 83% the start of the year. 

“Canadian DB pension plans ended the year at a near record high,” said Jared Mickall, Principal and leader of Mercer’s Wealth practice in Winnipeg. “Asset performance was generally strong during the quarter and liabilities were either stable or slightly declined. From a solvency perspective, DB pension plans for Canadian workers appear to be generally sound.”

In the final quarter of 2024, the Bank of Canada cut the overnight rate from 4.25% to 3.75% on October 23, and to 3.25% on December 11¹. While the overnight rate declined during the quarter, interest rates at longer durations were either stable or slightly increased. Due to the long-term nature of DB pension plans, stakeholders will be keen to monitor the movement of interest rates and credit spreads on Canadian bonds with longer maturities. 

Further, inflation in Canada continued its path of easing coming in at 1.9% in November², which is below the mid-point of the Bank of Canada policy target range of 1% - 3% for 2024. While this is encouraging, some components of inflation such as food and shelter continue to be elevated. Canadian DB pension plans with inflation-related benefits are advised to monitor inflation and how it may impact their obligations, both in the short-term and long-term. 

Looking ahead to 2025, there is the possibility that the incoming US administration could impose tariffs on Canadian and other countries' exports to the United States. The impacts of such tariffs on the Canadian economy, interest rates, inflation and markets are uncertain. 

Given the risk of a further decline to Canadian interest rates and ever-present market volatility, it is Mercer’s stance that a review of a pension plan’s risks to be retained or transferred (e.g. annuity purchase if appropriate) continues to be prudent. Pension plans with benefit payments that exceed the contributions may need to have a heightened awareness of financial risks posed by the negative cashflow. A regular review of a pension plan’s investment policy continues to be appropriate and such reviews may be expanded to include sustainable investment beliefs.

“Canadian DB pension plan sponsors and their members have made significant strides to improving their plans’ financial positions in recent years. As we enter an uncertain 2025, DB plans should make a New Year’s resolution to manage their financial positions for benefit security and contribution stability,” continued Mickall. “Appropriate governance, effective risk management, asset mix reviews with consideration for environmental, social, and governance factors, may help make that resolution become reality in 2025 - and despite the stormy seas ahead, help plans continue to deliver on the pension promise for their members.”

The Mercer Pension Health Pulse tracks the median ratio of solvency assets to solvency liabilities of the pension plans in the Mercer pension database, a database of the financial, demographic and other information of the pension plans of Mercer clients in Canada. The database contains information on approximately 450 pension plans across Canada, in every industry, including public, private and not-for-profit sectors. The information for each pension plan in the database is updated every time a new actuarial funding valuation is performed for the plan. 

The financial position of each plan is projected from its most recent valuation date, reflecting the estimated accrual of benefits by active members, estimated payments of benefits to pensioners and beneficiaries, an allowance for interest, an estimate of the impact of interest rate changes, estimates of employer and employee contributions (where applicable), and expected investment returns based on the individual plan’s target investment mix, where the target mix for each plan is assumed to be unchanged during the projection period. The investment returns used in the projections are based on index returns of the asset classes specified as (or closely matching) the target asset classes of the individual plans.   

^{1 Bank of Canada, 2024
2 StatCan, 2024}

Mercer, a business of Marsh McLennan (NYSE: MMC), is a global leader in helping clients realize their investment objectives, shape the future of work and enhance health and retirement outcomes for their people. Marsh McLennan is a global leader in risk, strategy and people, advising clients in 130 countries across four businesses: Marsh, Guy Carpenter, Mercer and Oliver Wyman. With annual revenue of $23 billion and more than 85,000 colleagues, Marsh McLennan helps build the confidence to thrive through the power of perspective. For more information, visit mercer.com, or follow on LinkedIn and X.

^{The findings, ratings and/or opinions expressed herein are the intellectual property of Mercer and are subject to change without notice. They are not intended to convey any guarantees as to the future performance of the investment products, asset classes or capital markets discussed. Information contained herein may have been obtained from a range of third party sources. While the information is believed to be reliable, Mercer has not sought to verify it independently. As such, Mercer makes no representations or warranties as to the accuracy of the information presented and takes no responsibility or liability (including for indirect, consequential or incidental damages), for any error, omission or inaccuracy in the data supplied by any third party. This does not constitute an offer or a solicitation of an offer to buy or sell securities, commodities and/or any other financial instruments or products or constitute a solicitation on behalf of any of the investment managers, their affiliates, products or strategies that Mercer may evaluate or recommend. This does not contain investment advice relating to your particular circumstances. No investment decision should be made based on this information without first obtaining appropriate professional advice and considering your circumstances.}