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Happy New Year!  With 2024 in the rear-view mirror, it’s time to look at what happened to defined benefit pension plans last year and make our predictions as to what lies ahead in 2025.

Financial Market Returns in 2024

Equity markets had an excellent year in 2024.  The TSX Composite Index returned 18% and the US S&P 500 equity index returned over 30% in 2024 in Canadian dollars.  Furthermore, fixed income indices also posted positive returns in 2024 with universe bonds returning 4%, and long-term bonds returning close to 1%.  In addition, the yields on long-term government bonds, which are commonly used to measure the future value of pension liabilities, were relatively stable throughout 2024 and only increased by around 30 basis points from December 31, 2023 to December 31, 2024.

Implications for Pension Funding

In light of the investment returns and changes in bond yields noted above, 2024 will prove to have been a great year for unhedged pension plans (i.e. those that have not adopted a ‘de-risked’ investment strategy).

In particular, the solvency position of unhedged pension plans will have improved by 12% or more – largely due to the strong investment returns in 2024.  Likewise, with the strong investment returns in the past year, the funded status on a going concern basis will also have improved by 12% or more for many unhedged pension plans in 2024.

This improvement will build upon the positive financial position that many pension plans find themselves in.  While most pensions are already well funded on a solvency and going concern basis, within our client base there are still a few plans with small deficits that may now be able to reduce or even eliminate a special payment schedule as a result of the improved funded status in 2024.  In addition, some plan sponsors may find that they can do an early valuation in 2025 to justify a contribution holiday.

Accounting Position at December 31, 2024

The yields on high-quality corporate bonds are fairly consistent at December 31, 2023 and December 31, 2024.  Thus, plan sponsors who use these yields to develop their discount rate assumption for the benefit obligations used in their December 31^st financial statement accounting entries should see that the benefit obligations for their pension and other post-retirement benefit plans will be fairly consistent from a year ago.  But combined with the investment experience in 2024, unhedged pension plans should see an improvement in their accounting position – again improving their funded status by 12% or more.

Key Themes to Watch in 2025

The following is a list of the key items that we expect will be top of mind for plan sponsors as we head into 2025:

Annuity Purchases:  As a continuing trend, we still see many plan sponsors showing an interest in annuity purchases and settling some (or all) of their liabilities.  This is increasingly true for ongoing plans with large numbers of retirees, where it is now possible to get an annuity discharge in many jurisdictions.  The timing for an annuity purchase may be right as plan sponsors find that their plans are well-funded; and some plan sponsors believe we may be near the top of a bull market run in the equity markets or are concerned that interest rates may fall in the near future.

Surplus:  Addressing issues with surplus has become top of mind, with many plan sponsors actively exploring how they can get value from the surplus in their plans with strategies like contribution holidays and plan mergers.  For plan sponsors with closed and/or frozen pension plans, the issues of accessing surplus can be complicated, and increasingly they are exploring their options as to how best to utilize the surplus, and how this may impact their decision to wind-up their plan.

De-risking, Winding-up, and CAAT:  Especially for entities with legacy closed or frozen defined benefit plans, the improvement in funded status over the past few years has made it less costly to adopt a de-risking investment strategy, purchase annuities, and/or formally wind-up their plan.  The decision to de-risk/wind-up a pension plan is never straightforward, and there are alternatives to winding-up – such as obtaining a discharge via an annuity purchase buy-out or merging into to a jointly sponsored pension plan like CAAT.  We would encourage plan sponsors to discuss these options with their consultant prior to making any decision.

CAPSA Guidelines #3 and #10:  In September, the Canadian Association of Pension Supervisory Authorities (“CAPSA”) released two guidelines – they updated CAPSA Guideline No. 3 for Capital Accumulation Plans and issued CAPSA Guideline No. 10 on the Risk Management for Plan Administrators.  These guidelines focus on providing plan sponsors with a set of ‘best practices’ to follow, and provide a risk management framework to identify, evaluate, manage, and monitor the various risks associated with sponsoring pension plans.  With these guidelines now final, we anticipate that many plan sponsors will be reviewing and making updates to their governance and risk management policies.

Ontario Target Benefit Pension Plan Framework:  In October 2024, the Ontario government filed various regulations to implement its permanent Target Benefit Plan framework.  This new Target Benefit Plan framework came into effect on January 1, 2025, and will require multi-employer pension plans to consider the transition and conversion provisions, and develop policies on funding and benefits, governance, and communications.  While multi-employer pension plans technically have 5 years to complete the transition and conversion process, we expect many of these plans will have already started.

Ontario Variable Life Benefits:  In November 2024, the Ontario government released a consultation paper on variable life benefits, which would allow defined contribution plans to pay retired members a variable payment life annuity (“VPLA”) where the payments are adjusted based on the investment performance of the fund, and mortality experience of the fund’s members.  Unfortunately, this option will really only be applicable to very large defined contribution pension plans, and it would be better if this were offered directly by financial institutions.   As we have noted in previous blogs here and here, it would be much better if the Federal government would ‘wake up some day’ and adjust the VPLA rules so that insurers and financial institutions could provide these benefits, and not just permit them for the small handful of super large DC plans in Canada.

Mortality Improvement: In the spring of 2024, a new mortality improvement scale was released by the Canadian Institute of Actuaries which relies more substantially on the results of stochastic mortality rate models fitted to mortality data, and less on the expert judgement that was used in the development of the previous mortality improvement scales.  Ultimately, this new mortality improvement scale assumes longer life expectancies than those which are currently in use – and would thus produce liabilities that are around 1% to 2% higher for a typical pension plan.

In contrast, there was a mortality study published by Canada’s Office of the Chief Actuary in the fall of 2024 which indicates that mortality improvement for the Federal government retiree population over the past 12 years has been lower than what was anticipated by the previous improvement scale – and could potentially suggest that the improvement scales currently in use are still a better estimate of mortality improvement.

We also wish to report that a new base mortality table for Canadian pensioners is expected to be released in the next year or two.  It is our expectation that many entities will hold off to review their mortality assumption on a holistic basis (i.e. reviewing both their base mortality assumption and their mortality improvement assumption) until that time.  Nevertheless, some entities may wish to adopt this new improvement scale sooner as a means to mitigate the potential change in the overall mortality assumption.

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As a reminder, we encourage plan sponsors to continuously monitor their plans, and to contemplate their long-term strategy for providing pension benefits.  At a minimum, this includes periodic reviews of their investment and funding policies.  As we begin a new year, now may be a good a time to review the design of your company’s pension plan(s) to ensure that they continue to meet the needs of the organization and its employees.

All the best to you in 2025!