Rise in bond yields | A positive effect on retirement provision

The financial health of defined benefit plans improved in the second quarter despite the year-to-date decline in financial markets, according to pension plan analysis and administration firm Mercer.

Posted at 6:00 am

Martin Vallieres

Martin Vallieres
The press

The reason for this opposite improvement in financial news?

“Despite significantly negative returns on the assets side [en marchés financiers]”The staggering rise in bond yields has been more than beneficial to the financial health of most defined benefit plans,” responds F. Hubert Tremblay, Senior Wealth Management Advisor at Mercer.

“Because some of the defined benefit plan assets consist of bonds, the value of these assets was negatively impacted by bond depreciation. It has also been negatively impacted by poor returns from the stock portfolio, Mr Tremblay explains in an email exchange with The press.

On the other hand, the significantly increased interest on the bonds reduced the amount of the solvency liabilities of the pension plans [coût total des futures prestations aux retraités].

Brother Hubert Tremblay

Ultimately, according to Mercer’s advisors, “the rise in interest rates negatively affects the current value of some of the pension fund’s assets, while it positively affects all of the liabilities. [coûts des futures prestations]. So far, we’ve seen a positive effect of rising bond yields on the solvency of most pension plans, more than offsetting poor returns from stock market stocks.”

According to the Mercer Index, which measures the financial health of nearly 500 public and private sector pension plans in Canada, the median solvency level of defined benefit pension plans fell from 108% on March 31 to 109% on June 30, 2022.

Similar to Q1, investment returns for most defined benefit plans turned negative in Q2 2022 as bond yields continued to rise.

These bond rates rose by 80 and 100 basis points (ie from 0.8% to 1%) in the second quarter, depending on the different maturities of bonds in the market.

Since the beginning of the year, the rise in bond yields has fluctuated between 160 and 230 basis points (between 1.6% and 2.3%), which according to the company Mercer represents a “significant increase in such a short period of time”.

Still volatile

Still, there is a risk that the financial health of defined benefit plans will be disrupted in the coming quarters, F. Hubert Tremblay warns.

“The rise in bond yields was a key positive factor in the second quarter. Still, pension plans face headwinds, such as B. the increased risk of recession, the ongoing conflict in Ukraine, high rates of inflation which mean that financial markets and funding levels of defined benefit pension plans remain extremely volatile. »

In addition, explains Mr. Tremblay, “Retirement plan administrators need to analyze the impact of high inflation on the plan(s) they serve [la santé financière] Employees and participants in these plans”.

Among other things, it could be “the erosion of purchasing power among participants in non-indexed defined benefit pension plans or the rising costs of indexed pension plans”.

F. Hubert Tremblay believes that in recent years defined benefit administrators “have had to adapt to employee demands for higher salaries that will ultimately increase the future cost of these final salary average pension benefits.” before retirement.

With the collaboration of André Dubuc, The press

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