Iran conflict, a weaker loonie, and rising liabilities erased gains from back-to-back record highs
Two consecutive quarters at a record-high solvency ratio of 124 percent proved short-lived for Ontario's defined benefit pension plans.
The Financial Services Regulatory Authority of Ontario (FSRA) reported April 23 that the median projected solvency ratio fell two percentage points to 122 percent as at March 31.
Weak investment returns, shifting discount rates, and a turbulent global market environment shaped by the conflict in Iran and persistent inflationary pressure drove the decline.
Despite the dip, funded positions remain historically strong.
Ninety percent of plans stayed fully funded on a solvency basis at quarter-end, down from 92 percent in Q4 2025.
Plans with solvency ratios between 85 percent and 100 percent rose to 8 percent from 6 percent over the same period, and the share of plans below the 85 percent threshold held steady at 2 percent for the third consecutive quarter.
FSRA attributed the decline to two factors.
Pension funds averaged a gross return of 0.5 percent and a net return of just 0.3 percent in Q1 2026.
On the discount rate side, the non-indexed commuted value rate for the select period fell 10 basis points while the ultimate period rate rose 10 basis points; the non-indexed annuity purchase discount rate dropped 9 basis points.
Together, those movements caused most plans to record a slight increase in pension liabilities.
Canadian equities held up, with the S&P/TSX Total Return Index gaining 3.9 percent for the quarter, but global equities dragged heavily on returns.
The MSCI World Total Net Return Index fell 1.8 percent, and the S&P Listed Private Equity Index lost 15.3 percent in Canadian dollar terms.
A hypothetical 60/40 balanced fund split across the S&P 500, S&P/TSX Composite Index, MSCI World Equity Index, and the FTSE Canada Universe Bond Index would have returned negative 0.1 percent for the quarter.
Losses were driven by the MSCI World Equity Index and the S&P 500.
The Canadian dollar fell 1.4 percent against the US dollar over the quarter, and WTI crude oil surged 83 percent in Canadian dollar terms, partly reflecting the Iran conflict's impact on energy markets.
Canada's government bond yield curve flattened and shifted upward, with the 2-year yield at 2.82 percent, the 5-year at 3.05 percent, and the 10-year at 3.46 percent.
Both the Bank of Canada (BoC) policy rate, at 2.25 percent, and the US Federal Funds Target Range, at 3.5 percent to 3.75 percent, remained unchanged in Q1 2026.
Canadian CPI eased to 1.8 percent in February from 2.4 percent in December 2025, while the US Bureau of Labor Statistics reported the US CPI rose 3.3 percent for the 12 months ending March 2026, driven by energy prices and the Iran conflict.
The BoC's January 2026 Monetary Policy Report maintained a 1.1 percent GDP growth projection for 2026, and Statistics Canada reported a 1.6 percent GDP increase for 2025.
Canada's population also declined in Q1 2026, which FSRA described as a rare occurrence.
Unemployment rates in both countries changed little over the quarter, with Canada at 6.7 percent and the US at 4.3 percent in March, compared to 6.8 percent and 4.4 percent respectively in December 2025.
Strong funded positions can obscure real vulnerabilities, FSRA warned.
The regulator said plans in solvency surplus should exercise prudence in managing that surplus, cautioning that elevated solvency positions may be temporary and can reverse quickly under unfavourable market or economic circumstances.
FSRA called on plan sponsors and administrators to maintain a disciplined approach to funding, investment, and risk management to protect the long-term financial security of plan beneficiaries.
