The Willis Towers Watson Pension Index has increased in the third quarter as a decrease in the liability index, due to a slight increase in discount rates, was combined with slightly positive asset returns. The net effect on our benchmark plan was an increase of 2.0% in the Willis Towers Watson Pension Index (from 84.4 to 86.1) for the quarter.
Willis Towers Watson Pension Index
The Bank of Canada maintained its overnight lending rate at 0.25% through Q3. The yield on 30-year Canada treasuries continued its downward trend from the end of Q2 until early August and then stayed flat for most of the quarter before starting to rise mid-September. It ended the quarter at a high of 1.98%, up 14bps from the start of the quarter. Credit spreads also stayed flat throughout the quarter. The benchmark discount rate determined under the RATE:Link methodology used to determine defined benefit obligations increased by 17 bps, leading to a decrease in accounting liability measures over the quarter.
Key Bond Yields (at end of month)
| Sep. 2021 |
Jun. 2021 |
Sep. 2020 |
|
|---|---|---|---|
| Canada Treasuries(1) | |||
| 30-year | 1.98 | 1.84 | 1.11 |
| 10-year | 1.51 | 1.39 | 0.57 |
| 91-day T-bill | 0.14 | 0.14 | 0.12 |
| Corporate Bonds(1) | |||
| FTSE | 2.29 | 2.19 | 1.90 |
| Benchmark Discount Rate | 3.32 | 3.15 | 2.67 |
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.
Global equity markets posted positive returns for the sixth quarter in a row.
Despite increasing volatility and September sell-off as yields rise, global equity markets posted positive returns for the sixth quarter in a row. US and International equities outperformed Canadian equities in local currencies during the quarter (respectively 0.6%, 1.3% and 0.2%). Inflation continues to take centre stage with increasing challenges to the narrative that it is merely transient. Continued bottlenecks in global supply chains and increasing energy prices have led to inflation measures above those estimated by many central banks. Investors continue to closely watch how central banks will respond, with expectations that they may need to increase interest rates earlier than previously targeted. During Q3 we saw a weakening in the CAD relative to USD and other international currencies which, for unhedged Canadian investors, increased CAD returns on US and international equity investments.
The increase in the long end of the yield curve led to negative returns for long duration bonds, while short duration bonds managed to edge out small positive returns. Corporate bonds outperformed government bonds.
| Q3 2021 | YTD | Last 12 months | |
|---|---|---|---|
| Stock Returns | |||
| Canadian Equities – S&P/TSX Composite(2) | 0.2% | 17.5% | 28.0% |
| U.S. Equities – S&P 500 (Canadian dollars)(3) | 2.8% | 15.2% | 23.9% |
| Non-North American Equities – MSCI EAFE (Canadian dollars)(4) | 1.8% | 7.7% | 19.8% |
| Canadian Fixed Income Returns | |||
| 91-day T-Bills | 0.1% | 0.1% | 0.2% |
| FTSE Universe Bonds | -0.5% | -4.0% | -3.3% |
| FTSE Long Bonds | -1.6% | -8.9% | -8.1% |
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 0.1% for the quarter. The more conservative 30% equity portfolio decreased 0.6% for the quarter, and the more aggressive 70% equity portfolio increased 0.8% 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 increased over the quarter by 17 basis points to 3.32% at September 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 decreased by 1.8% for the quarter, reflecting the combined effect of interest accumulation and the discount rate change.
The impact of the increase in the liability discount rate together with small positive investment returns resulted in a net increase in the Willis Towers Watson Pension Index over the quarter, from 84.4 to 86.1 as at September 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.
| Q3 2021 | YTD | Last 12 Months | |
|---|---|---|---|
| Portfolio Returns | |||
| 30% Stocks/70% Fixed Income | -0.6% | -2.8% | 0.5% |
| 50% Stocks/50% Fixed Income | 0.1% | 1.5% | 6.6% |
| 70% Stocks/30% Fixed Income | 0.8% | 5.8% | 13.0% |
| Benchmark Plan Liability Results | |||
| Change in Pension Liability Index | -1.8% | -8.6% | -7.3% |
| Percentage Change in Pension Index | 2.0% | 11.0% | 15.0% |
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 – Third Quarter 2021 | .2 MB |
