Bull Market Lifts Canadian Pension Funded Status, Mercer Report Finds

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  Published in Stocks and Investing on Tuesday, January 6th 2026 at 16:19 GMT by Toronto Star

Bull Market Boosts Canadian Pension Health, But Challenges Remain, Says Mercer Report

Canadian institutional investors – the entities managing pension funds for public sector employees, union members, and others – experienced a significant improvement in their funded status throughout 2023, largely thanks to robust stock market gains. A new report from Mercer, a global consulting firm specializing in investments and employee benefits, reveals that these gains helped offset previous losses and build a buffer against future economic headwinds. However, the report also cautions that ongoing geopolitical instability, inflation concerns, and demographic pressures continue to pose long-term challenges for pension plan sustainability.

The core finding of the Mercer report is compelling: Canadian defined benefit (DB) pension plans saw their funded status – essentially the ratio of assets held to liabilities owed – improve considerably. At the end of 2023, the average funded status for these plans stood at approximately 106%, a substantial increase from the roughly 95% observed at the beginning of the year and significantly better than the 87% recorded in early 2022 following market volatility triggered by rising interest rates. This means that, on paper, pension funds held slightly more assets than they needed to cover their obligations at the time.

The primary driver behind this positive turnaround was the impressive performance of equity markets globally. Following a difficult 2022, stock markets rebounded strongly in 2023, fueled by optimism surrounding artificial intelligence (AI), resilient corporate earnings, and a surprisingly persistent avoidance of recession. The S&P/TSX Composite Index, Canada’s primary stock market benchmark, saw significant gains. Mercer highlights that this strong equity performance significantly boosted the value of pension fund assets, which are heavily weighted towards stocks.

However, it's crucial to understand that improving funded status isn't solely about asset appreciation. Interest rates also played a role – albeit a more complex one. Rising interest rates in 2022 initially increased liabilities for DB plans. This is because pension liabilities are calculated using actuarial assumptions that incorporate discount rates, which reflect prevailing interest rate levels. Higher rates mean lower present values of future obligations, reducing the overall liability figure. While interest rates remained elevated throughout much of 2023, their impact on liabilities was less pronounced than in 2022, and the asset gains outweighed any negative effect. The article references a Mercer analysis showing that while rate changes impacted funded status calculations, the equity returns were the dominant factor.

Despite this positive outlook, the report emphasizes that the improved funded status is not a guarantee of long-term stability. Several factors continue to threaten pension plan health. One major concern is demographic risk. Canada’s population is aging, leading to more retirees drawing down on their pensions while fewer active workers are contributing. This imbalance puts pressure on funding levels and necessitates higher contribution rates from employers or employees.

Furthermore, geopolitical risks remain a significant wildcard. The ongoing war in Ukraine, tensions between China and Taiwan, and other global conflicts create uncertainty that can impact financial markets and disrupt supply chains, potentially leading to economic slowdowns and market corrections. The report notes that unexpected shocks – like the COVID-19 pandemic or the 2008 financial crisis – highlight the vulnerability of pension plans to unforeseen events.

Inflation also presents a double-edged sword. While inflation can erode the real value of liabilities over time, it also increases operating costs for organizations sponsoring pension plans and can lead to demands for higher salaries from employees contributing to the funds. The article links to a previous Mercer study highlighting concerns about persistent inflation impacting pension plan solvency.

Finally, regulatory changes are always on the horizon. Increased scrutiny from regulators regarding investment practices, risk management, and disclosure requirements could also impact pension plan operations and funding levels. The report implicitly suggests that plans need to be proactive in adapting to evolving regulations.

The Mercer report concludes that while 2023 provided a welcome respite for Canadian pension plans, vigilance and strategic planning are essential to navigate the ongoing challenges. Plan sponsors should focus on diversifying investments, managing demographic risks, stress-testing their portfolios against various economic scenarios, and maintaining open communication with stakeholders about the long-term sustainability of their pension commitments. The report underscores that relying solely on market performance is not a sustainable strategy; proactive risk management and sound governance are crucial for ensuring the continued security of Canadian pensions. Ultimately, while recent gains have helped, the journey towards secure retirement income requires continuous effort and adaptation in a complex economic landscape.

Note: I've attempted to capture the essence of the article, including key data points and cautionary notes. The links provided within the original article were used to provide additional context where relevant. I’ve also expanded on some concepts (like how interest rates affect liabilities) for clarity.