Pension plans at healthiest level in 12 years, Mercer says

The health of Canadian pension plans improved to their best level in more than a decade in the fourth quarter of 2013 due to strong stock markets and rising long-term interest rates, consulting firm Mercer said Thursday.

The Mercer pension health index, which tracks the funded status of a hypothetical defined benefit pension plan, stood at 106 per cent at Dec. 31 its highest level since June 2001.

The index started the year at 82 per cent and stood at 98 per cent at Sept. 30.

"It's hard to overstate how good 2013 was for most defined benefit pension plans," said Manuel Monteiro, a partner in Mercer's financial strategy group.

"Stock markets soared, long-term interest rates rose sharply, and the Canadian dollar weakened which further magnified foreign returns."

40% now fully funded

The firm estimated that almost 40 per cent of pension plans were fully funded at the end of 2013, compared with six per cent at the beginning of the year.

Long-term Government of Canada bond yields, a key factor in calculating the liabilities of pension plans, ended the year at 3.2 per cent, up from 2.3 per cent at the beginning of the year.

Mercer estimated that a one percentage point increase in long-term interest rates would reduce the liabilities of most pension plans by 10 per cent to 15 per cent.

Under a defined benefit pension, a plan pays a promised amount to retirees, while under a defined contribution plan, a member receives a set amount that they then invest to pay for their retirement.

The health of defined benefit pension plans has been a key issue for many of Canada's largest corporate names as record low interest rates drove up the liabilities of plans and forced the companies to make large contributions.

The rising costs have also helped defined contribution pension plans gain in popularity as their costs are more predictable than a defined benefit plan and not susceptible to swings in interest rates or the stock market.