Pension plan funded ratios soar in Q3 2025, fuelled by strong markets and strategic risk management
A surge in investment returns has propelled the average funded ratio of Canadian pension plans to 134 percent as of September 30, marking a 4 percent rise in the third quarter and a 5 percent increase year to date, according to Normandin Beaudry’s latest Pension Plan Financial Position Index.
The solvency ratio also climbed, reaching 120 percent—a 5 percent gain in Q3 and up 6 percent since the start of the year.
These improvements reflect not only robust market performance but also relatively stable pension liabilities, as discount rates held steady over the period.
Normandin Beaudry attributes the third quarter’s strengthened financial position primarily to higher-than-expected investment returns, while noting that pension liabilities saw little change due to stable discount rates.
The firm also reports that current service costs have remained consistent with levels seen at the beginning of the year.
The financial market context has played a significant role.
As reported by Normandin Beaudry, stock markets delivered favourable returns in Q3, with technology and AI stocks driving sector concentration in global indices.
In Canada, the S&P/TSX surged 24 percent since January, half of which occurred in the third quarter, largely on the back of exceptional performance in the gold sector.
The weighting of gold stocks in the Canadian index recently doubled to 13 percent, as investors sought safe-haven assets amid inflation concerns, US dollar weakness, and ongoing geopolitical and monetary policy uncertainty.
Interest rates have also influenced pension plan strategies.
The Bank of Canada reduced its policy rate by 0.25 percent to 2.5 percent, continuing a monetary easing cycle that began in April 2024.
Meanwhile, the US Federal Reserve also lowered its rate by 0.25 percent, but the US policy rate remains higher, in the 4.00 percent to 4.25 percent range.
Both central banks have prioritized addressing economic downturns and unemployment, with inflation risks considered limited.
Normandin Beaudry notes that many pension plans entered 2025 in a strong financial position, despite a brief market correction in April.
The subsequent market rally enabled most plans to maintain or increase surpluses.
In response to ongoing uncertainty—such as the impact of tariffs on corporate earnings and market concentration—plans have adopted a range of funding strategies.
These include setting thresholds for surplus use, establishing margins for adverse deviations, and implementing mechanisms to ensure equitable consideration for all stakeholders.
The purchase of group annuities has also gained traction, allowing plans to transfer investment and longevity risks to insurers, a strategy supported by favourable interest rate conditions and strong insurer appetite.
As per Normandin Beaudry, liabilities on a funding basis and current service costs showed little change, while liabilities on a solvency basis declined due to higher discount rates. The third quarter’s returns exceeded expectations for future returns on both funding and solvency bases.
