Higher interest rates on bond yields, not stock markets, are the key

Higher interest rates more than compensated for stock market losses to help lift the solvency of Canadian defined-benefit pension plans to a record level, says a new report from Marsh & McLennan Companies Inc.

The Marsh Pension Health Pulse said the median solvency ratio — one way to gauge a plan’s financial health — of the 435 defined-benefit (DB) pension plans tracked by the company reached an all-time high of 132.5 per cent in the third quarter.

The current median solvency ratio indicates the average DB plan holds an extra 32 cents for every dollar promised to date.

“While investment returns were slightly negative over the third quarter, higher interest rates reduced actuarial liabilities significantly and more than offset the investment declines,” Marsh said in a press release on Tuesday.

The Bank of Canada has held its overnight lending rate at 2.25 per cent since it cut rates last October, but bond yields have been climbing as investors worry about the effects of elevated oil prices on inflation and the rising debt load of governments and corporate borrowers such as the tech giants.

The yield on the 10-year Government of Canada bond dipped at the start of the year, but has since risen about 25 per cent to 3.9 per cent as of midday Tuesday, the highest level since 2023.

DB pension plans’ median solvency ratio increased four per cent in the third quarter, following a five per cent increase in the second quarter, which combined wiped out the declines in the first quarter.

“Canadian defined-benefit pension plans continue to show strong resilience despite ongoing market and geopolitical volatility,” Brad Duce, a principal at Marsh based in Toronto, said.

Marsh said 69 per cent of DB plans have a solvency ratio of more than 120 per cent, 89 per cent had a solvency ratio of 100 per cent or more and 11 per cent were in a deficit position with a ratio of below 100 per cent.

The Financial Services Regulatory Authority of Ontario said in a pension update in August that DB plans in the province had a median solvency ratio of 127 per cent at the end of the second quarter, up from 122 per cent at the end of the first quarter.

According to Statistics Canada data released in June 2025, 7.2 million Canadians had either a DB pension plan, a defined-contribution plan or some type of hybrid plan. DB plans accounted for about two-thirds of employer- and union-sponsored pensions in Canada.

With funds looking at surpluses, Marsh said the time might be right for plans to look at tweaking their investment strategy.

A global poll of 430 portfolio managers released by Marsh at the end of September said Canadian asset owners were “leading the way” in cutting exposure to United States equities, and 66 per cent said they planned to invest more in infrastructure.

The latter intention is “a trend that aligns with recent discussions among Canadian pension investors, including at the Canada Investment Summit in Toronto,” Marsh said.

A think-tank report out at the end of September said Canada’s government should implement a formal mandate for the country’s pension plans to invest three per cent of their assets in high-growth companies at home.

“It should be entirely possible for a sophisticated investment fund to allocate three per cent to Canadian growth assets, and balance the risk through the allocation of the other 97 per cent of assets,” argued the Canadian Shield Institute.

— with a file from Bloomberg