The Willis Towers Watson Pension Index has increased in the second quarter due to positive investment returns. The asset increase was offset partially by an increase in the liability index due to a slight decrease in discount rates. The net effect on our benchmark plan was an increase of 1.2% in the Willis Towers Watson Pension Index (from 83.4 to 84.4) for the quarter.
Willis Towers Watson Pension Index
The Bank of Canada maintained its overnight lending rate at 0.25% through Q2. The yield on 30-year Canada treasuries hit a high of 2.19% on May 15th before beginning a steady decline to end the quarter at 1.84%, 13 bps lower than the start of the quarter. Credit spreads, depending on the maturity, narrowed slightly to end the quarter. As a result, the benchmark discount rate determined under the RATE:Link methodology used to determine defined benefit obligations decreased by 18 bps, leading to an increase in accounting liability measures over the quarter. Conversely, the 91-day T-bill ended the quarter 6 bps higher than it began.
Key Bond Yields (at end of month)
| Jun. 2021 |
Mar. 2021 |
Jun. 2020 |
|
|---|---|---|---|
| Canada Treasuries(1) | |||
| 30-year | 1.84 | 1.97 | 0.99 |
| 10-year | 1.39 | 1.55 | 0.52 |
| 91-day T-bill | 0.14 | 0.08 | 0.20 |
| Corporate Bonds(1) | |||
| FTSE | 2.19 | 2.19 | 2.12 |
| Benchmark Discount Rate | 3.15 | 3.33 | 2.51 |
1) Information prior to June 2015 and FTSE Corporate bond yield provided by FTSE Global Debt Capital Markets Inc. Copyright © FTSE Global Debt Capital Markets Inc. All rights reserved. The information contained herein may not be redistributed, sold or modified or used to create any derivative work without the prior written consent of FTSE Global Debt Capital Markets Inc. Effective June 2015, Canada 10 and 30 year yield were obtained from the Bank of Canada; the 91-day T-bill yield was obtained from Scotiabank.
US and Canadian equities outperformed International equities in local currencies during the quarter.
Global equity markets had another strong quarter posting positive returns for the fifth quarter in a row, led by the US market. This despite investors’ concerns regarding inflation and tightening monetary policy along with rising oil prices in a global growth recovery environment. The U.S. Fed acknowledged that it may raise rates sooner than expected to combat rising inflation. Growth stocks outperformed value as yields peaked and then pulled back, reversing the trend from late 2020 and first quarter 2021. US and Canadian equities outperformed International equities in local currencies during the quarter (respectively 8.6%, 8.5% and 4.8%). During Q2 we continued to see a strengthening in the CAD which, for unhedged Canadian investors, decreased CAD returns on US and international equity investments.
After hitting highs midway through the quarter, bond yields began to decline and ended the quarter lower than they started. This decrease in yields led to positive returns across the bond universe, particularly longer duration bonds, with government bonds outperforming corporates.
| Q2 2021 | YTD | Last 12 months | |
|---|---|---|---|
| Stock Returns | |||
| Canadian Equities – S&P/TSX Composite(2) | 8.5% | 17.3% | 33.9% |
| U.S. Equities – S&P 500 (Canadian dollars)(3) | 7.1% | 12.0% | 28.3% |
| Non-North American Equities – MSCI EAFE (Canadian dollars)(4) | 3.8% | 5.8% | 20.6% |
| Canadian Fixed Income Returns | |||
| 91-day T-Bills | 0.0% | 0.1% | 0.1% |
| FTSE Universe Bonds | 1.7% | -3.5% | -2.4% |
| FTSE Long Bonds | 3.7% | -7.4% | -6.9% |
2) Bloomberg LP. All S&P/TSX Composite indices are registered trademarks of The Toronto Stock Exchange Inc. and Standard & Poor’s Corporation.
3) Bloomberg LP. All S&P indices are registered trademarks of Standard & Poor’s Corporation
4) Bloomberg LP. All MSCI indices are registered trademarks of Morgan Stanley Capital International Inc.
The benchmark plan’s 50% equity / 50% fixed income portfolio increased 4.9% for the quarter. The more conservative 30% equity portfolio increased 4.4% for the quarter, and the more aggressive 70% equity portfolio increased 5.4% for the quarter.
Pension plan liabilities under Canadian, International and U.S. accounting standards are measured using a discount rate based on yields available on high-quality corporate bonds as of the measurement date. Using the same RATE:Link methodology as we use for the Willis Towers Watson Pension Index in other countries, the discount rate for our benchmark plan decreased over the quarter by 18 basis points to 3.15% at June 30, 2021. Among other factors, the selected discount rate depends on projected plan cash flows, the bond data and the methodology utilized for constructing the yield curve. The RATE:Link approach represents one possible methodology; other acceptable methodologies may result in higher or lower discount rates, and consequently lower or higher plan liabilities.
Willis Towers Watson tracks the monthly change in its Pension Index in a series that dates to December 31, 2000. Like bond prices, pension liability values move in the opposite direction to interest rates. The Willis Towers Watson Pension Liability Index increased by 3.6% for the quarter, reflecting the combined effect of interest accumulation and the discount rate change.
The impact of the decrease in the liability discount rate together with the positive investment returns resulted in a net increase in the Willis Towers Watson Pension Index over the quarter, from 83.4 to 84.4 as at June 30, 2021. The change in the Willis Towers Watson Pension Index does not reflect any contributions made to reduce the size of any deficit or any contribution holiday taken on account of any surplus.
| Q2 2021 | YTD | Last 12 Months | |
|---|---|---|---|
| Portfolio Returns | |||
| 30% Stocks/70% Fixed Income | 4.4% | -2.2% | 2.3% |
| 50% Stocks/50% Fixed Income | 4.9% | 1.3% | 8.8% |
| 70% Stocks/30% Fixed Income | 5.4% | 5.0% | 15.6% |
| Benchmark Plan Liability Results | |||
| Change in Pension Liability Index | 3.6% | -6.9% | -7.3% |
| Percentage Change in Pension Index | 1.2% | 8.8% | 17.3% |
5) The discount rate assumption is adjusted to reflect changes in market interest rates. Our benchmark plan is a traditional final-pay pension plan with approximately half of the liabilities in respect of active employees and half of the liabilities in respect of terminated vested and retired employees. Plans with different designs or demographic characteristics will see different results in terms of both the level of appropriate discount rate and the plan’s response to changes in financial assumptions.
This report reviews how capital and equity market performance affected Canadian defined benefit pension plans, with a focus on linked asset/liability results. Specific plan results depend on liability characteristics, portfolio composition and actual investment results, among other factors.
This publication tracks the asset/liability performance of a hypothetical Canadian benchmark pension plan, based on a 50/50 asset mix and a typical liability profile. The index is not intended to represent an average funded ratio. Rather, the intent is to provide plan sponsors with a consistent and relevant measure to serve as a general indicator of the effects of capital market events on pension plan financing.
| Title | File Type | File Size |
|---|---|---|
| Pension Finance Watch – Second Quarter 2021 | .1 MB |
