The average financial health of Canadian pension plans dipped in the first quarter of 2025, as global market volatility and falling discount rates contributed to reduced funded and solvency ratios, according to new data from Normandin Beaudry.
As of March 31, 2025, the average funded ratio of pension plans stood at 127 per cent, down from 129 per cent at the end of 2024. The decline reflects weaker-than-expected investment returns and a slight drop in discount rates, which increased plan liabilities, said the firm.
“Current service costs also inched up over the quarter,” the report noted. The funded ratio does not account for asset smoothing, meaning plans that use such a mechanism may have experienced less pronounced impacts.
Solvency ratios also slide
The average solvency ratio fell to 111 per cent, down three percentage points since the start of the year. Solvency measures the ability of a plan to meet its obligations if it were wound up today.
The same factors behind the decline in the going concern position—market performance and discount rate reductions—also affected the solvency figures, said Normandin Beaudry.
Macroeconomic backdrop heightens uncertainty
The first quarter was marked by sharp stock market swings, largely in response to a series of executive orders and trade actions introduced by the new U.S. administration. These policies, particularly tariffs, have had ripple effects across global markets, prompting the OECD to revise its 2025 growth forecasts downward for multiple countries, including Canada and the United States.
Investor sentiment in the U.S. dropped to its lowest level since the onset of the COVID-19 pandemic. The downturn was especially pronounced among major technology stocks—dubbed the “Magnificent Seven”—which underperformed and weighed heavily on the S&P 500 and MSCI World indices.
In response to growing economic pressure, the Bank of Canada reduced its key interest rate twice during the quarter, bringing it to 2.75 per cent. While the bond market posted positive returns overall, short-term bonds outperformed other categories.
Resilience strategies prove valuable
Despite the headwinds, many pension plans entered 2025 with risk mitigation strategies already in place, including diversification, liability-driven investing, and funding cushions. These measures have helped plans remain relatively well-positioned, said Normandin Beaudry.
Still, the firm urged plan sponsors to maintain discipline. “It is essential to remain calm and adopt a long-term view when making investment decisions,” the report said, adding that governance practices such as rebalancing and avoiding reactive decisions are critical during volatile periods.
Currency risk is one area that may warrant renewed focus, given the Canadian dollar’s relative weakness and increased hedging costs, the firm added.
Key figures from Q1 2025:
- Average funded ratio: 127% (down 2% year-to-date)
- Average solvency ratio: 111% (down 3% year-to-date)
- Bond markets posted positive returns
- Global equity markets posted negative returns
- Discount rates fell slightly, pushing up liabilities and service costs
