Pausing payments might help for now but that also creates fresh pressure on budgets and planning down the road, warns Samantha Allen
Mercer’s latest Pension Pulse report has found that Canadian defined benefit pension plans are sitting on surpluses that would have been unthinkable a decade ago.
According to the findings, the median solvency ratio for DB plans sits at 123 per cent. That figure has held firm even through a volatile first quarter marked by equity market swings and geopolitical uncertainty.
"DB plans continue to remain in a very strong financial position," said Samantha Allen, principal at Mercer.
Still, the last quarter of 2026 was choppy as equity markets climbed for a few months before a rough March dragged returns close to flat, noted Brad Duce, also a principal at Mercer, adding that plans seem “a little bit more resilient than they've been through past financial volatile times."
Allen points to a combination of strong asset returns over recent years and higher interest rates, which have lowered the present value of liabilities, as the twin forces holding up these funded positions while Duce credits something else too: a shift in how plan administrators think about risk.
"A lot of plans have taken a bit of a de-risking approach over the last several years," he noted, adding with surpluses in hand, plans have reallocated their asset mix to withstand interest rate swings and market shocks.
That resilience is notably fuelling a growing trend, according to Mercer, who notes employers have been taking on additional contribution holidays. The term refers to a temporary pause or reduction in employer contributions to a pension plan.
Allen draws a distinction between two categories. While some holidays are mandatory, the Income Tax Act restricts contributions when a plan's going concern funded ratio exceeds a certain threshold. Meanwhile, others are optional, where the employer chooses to pause.
According to Mercer, the count has more than doubled over the past five years.
“These types of decisions tend to be governed by funding policies that are adopted by the plan sponsor to look at all the different factors in making that decision,” explains Allen. “Different surplus management strategies will look very different.”
Furthermore, Duce sees a related dynamic among DB plans that have occasionally been closed to new members.
"If there's been a surplus and those types of plans that it's developed, there's potentially more likelihood that a contribution holiday would be taken because they've built up a surplus but there's a declining future expectation in terms of value that's going to be accrued by future members," he said.
Still, Allen emphasized sponsors need to think past the short-term relief of a contribution holiday because while pausing payments might help right now, if contributions have to restart a year later, that can create fresh pressure on budgets and planning, she noted.
Additionally, employers also have to notify employees when a contribution holiday is taken, whether it’s mandatory or optional, and that message can be difficult to manage, she said.
Duce also agrees that a strong surplus shouldn’t be treated as a free pass. After all, pension plans still carry risk, even when markets and funding levels have been favourable. While some of that risk can be managed through investment strategy, not all of it does as liabilities can still outpace assets and erode a surplus.
He points to new mortality research in Canada as one example of the kind of development that can push liabilities higher than expected. While recent years have been good for defined benefit plans, supported by higher interest rates and solid equity performance, those conditions won’t last indefinitely.
After all, plans that are focused on de-risking need an accurate picture of their liability cash flows, and that starts with using the right mortality assumptions. If the mortality basis is wrong, the investment strategy built around it will not match the actual liabilities. Duce notes that the last time mortality tables were updated, costs rose for many plans during a period that was far more difficult financially.
Contrastingly, this time around, the timing is more manageable.
"It's probably a good time to reflect mortality changes because most plans are in a surplus position," he said, adding that absorbing those adjustments from a position of strength is far easier than doing so in deficit.
“There's a cyclical nature to some of this and there are other aspects as well that can impact a plan's funded status, such as mortality, as I mentioned. So when there are good times, it's good practice to maintain them,” said Duce.
When surplus becomes an issue, Allen suggests, is when the Income Tax Act upper limit begins to restrict contributions. That is the point where sponsors are forced to pay closer attention to how much excess funding is sitting in the plan.
“They can look at strategies, whether it’s benefit improvements or de-risking, to try to keep those funded ratios within their own range. That may differ due to the buffer margins they may want to include in their positions,” noted Allen.
Beyond that, she suggests there is no single accepted definition of what counts as too much surplus.
Still, there’s no universal answer because as Duce suggests, public sector, private sector and negotiated plans all have their own demographics, membership profiles, and expectations around future benefits. What matters, in his view, is having “a strong governance framework that identifies when excess funding is too much funding and what to do."
That might mean contribution holidays for some plans and benefit improvements for others. Some plan sponsors have already built that kind of framework, setting out in advance how they will deploy surplus once it reaches a certain level. Without that discipline, decisions risk being ad hoc and inconsistent across generations of plan members.
“If you have a strong governance process, then you can set out the framework to determine what you do when you hit those access limits,” noted Duce.
