The past year has been one of the friendliest for pension plans. The one that is just starting will be full of challenges and uncertainties. Human resources firm Mercer released its index on the financial health of defined benefit pension plans. This measure of the median solvency of more than 500 pension plans in its database stood at 103% as of December 31, seven percentage points higher than that quantified at the beginning of 2021.
On the asset side, returns were strong in the equity market, with the benchmark S & P / TSX surging 25% in 2021 propelled by a 28% gain in the large cap segment. For their part, yields on long-term bonds remain higher than at the start of the year, fluctuating between 1.7% and 2.5% as of December 31. They fluctuated between 1.1% and 2% a year earlier.
On the liabilities side, the interest rates used to evaluate the commitments of the plans went from 2.34% to 2.82%, underlined the firm Aon. This increase, combined with a 7% return on assets, “has significantly improved the funded status of pension plans in Canada.” According to the risk monitoring tool used by this firm, the overall capitalization ratio of Canadian pension plans associated with the S & P / TSX index rose to 97.2% as at December 31, 2021, compared to 89.4% in the last 12 previous months.
This summary, positive assessment of 2021 precedes a year 2022 which is rather muddled on the radar of projections. Mercer offers a long list of obstacles or unknowns. It begins with the repercussions of the Omicron variant and the possible emergence of new variants, extending to vaccine availability in developing countries, heightened geopolitical tensions, political deadlock in the United States and the United States. uncertainty surrounding the mid-term elections next November. The list expands from the persistence of inflation growth beyond targets and the reaction of central banks, to encompass a labor market subject to upward pressure on wages and a shortage of labor. work fueling inflationary pressures.
Not to mention, in the immediate future, Omicron and its contagious effect, which accentuates the problems linked to supply chain disruptions and labor shortages.
Inflationary risk
Moreover, according to the minutes of the last meeting of December 14 and 15 of the Monetary Committee of the United States Federal Reserve, “most participants noted that[…] it might become justified to increase policy rates earlier or at a faster rate than this [qu’ils] had planned before, ”took again Agence France-Presse on Wednesday. They point to the likelihood that the emergence of Omicron will exacerbate “rising housing costs and rents, more widespread wage growth driven by labor shortages and prolonged global tensions on the part of the United States. ‘offer’. Especially since “participants generally expect bottlenecks in the global supply chain to persist at least until next year.”
And even though it is recognized that a substantial improvement in labor market participation would take longer than expected, and the US central bank has repeatedly stated that it will keep rates low until full employment returns , some Committee participants argued that in certain circumstances “it would be appropriate to address them before they can be achieved.” “
Metamorphosis in 2022 and after
This goes for 2022. “In the longer term, it becomes more and more urgent to ensure the sustainability of plan assets in the face of climate change,” adds Aon, who urges plan sponsors to use their improved funding situation. “To undertake risk reduction strategies and protect the funding of their plans.”
Mercer offers a broader perspective by placing its 2022 global seminars under the theme of metamorphosis. Inspired by a pandemic that tested the model, we propose, from the outset, to reflect on the limits of central bank intervention giving priority to employment over inflation, in the context of an attenuation of the disinflationary forces yesterday, fueled mainly by globalization and technological change.
The foreseeable future will see increased reliance on robotization, automation and digitalization. It will also highlight the economic development of the Asia zone with, as a locomotive, a China called to dethrone the United States at the forefront of the largest economies on the planet and an economic rise in India and the United States. Southeast Asian region.
In the meantime, the establishment of fintech that will shake the traditional banking model should be confirmed, with the strengthening of decentralized finance promoting the growth of crypto-assets, Mercer believes.
On the climate change scene, the emergence of a potential ESG investment bubble stemming from the distortion caused by too much greenwashing will encourage impact investing, while the strong pressure exerted by the electrification of the economy on some six major metals will advocate for a circular economy approach.