Higher Rates Shrink What Pensions Owe: How Canadian Plans Reached Near-Record Solvency

A pension that promises someone $30,000 a year starting in 2040 has no fixed price today. The cost depends on what the money can earn between now and then. That single idea explains why so many Canadian defined benefit plans moved from years of shortfalls to some of the strongest positions on record.

What the plan owes depends on interest rates

A defined benefit plan is the kind where the employer promises a set income in retirement, usually based on salary and years of service. It is different from a defined contribution plan or an RRSP, where what you get depends on how your own investments perform.

To check whether a plan can keep its promises, actuaries add up every future payment and work out what that stream is worth in today's dollars. The interest rate they use for this is tied to bond yields. When yields are low, the plan has to hold a lot of money today because that money will not grow much. When yields are higher, it needs less.

A simple example shows the difference. Suppose a plan must pay $1,000 twenty years from now. At a 2% rate, it needs about $673 set aside today. At 4.5%, it needs about $415. The promise is the same, and the retiree gets the same $1,000. But on paper the plan's debt has shrunk by close to 40%.

The solvency ratio compares what a plan holds with what it would owe if it had to settle every promise at once. At 100%, the two match. Above 100%, the plan has a surplus.

From a decade of deficits to a surplus

Through much of the 2010s, rates sat near historic lows. Pension obligations looked enormous, and many employers had to put in extra cash just to keep their plans within the rules. When the Bank of Canada raised rates sharply in 2022 and 2023, longer-term bond yields rose with them, and that pressure reversed quickly.

Mercer's Pension Health Pulse put the median solvency ratio of Canadian plans at 125% at the end of 2024, near a record high, and it was still 123% at the end of March 2026. That held even after the Bank of Canada began cutting its policy rate. Pension valuations follow long-term bond yields more closely than the overnight rate, and long yields did not fall as far. Strong stock markets helped on the asset side too.

Higher bond yields also let plan managers shift more money into bonds that roughly match their future payments. That locks in much of the gain and lowers exposure to market swings. Some employers have gone a step further and bought annuities from insurance companies, which hands the promise to an insurer.

What it means in Edmonton

Many people here are members of defined benefit plans, including public sector workers in the Local Authorities Pension Plan and employees of larger energy firms. In Alberta, private sector plans registered here follow the funding rules in the Employment Pension Plans Act. For members, a well funded plan means the promised income is better protected.

That matters when you plan a move. Lenders count pension income when they decide how much you can borrow, and your total housing and debt payments generally cannot exceed 44% of gross income under CMHC's debt service limits. For someone near retirement thinking about a move-up home or a rental property, a pension backed by a healthy plan is income a lender can rely on.

Where the limits are

A surplus is a calculation, not a pile of spare cash waiting to be shared. If long-term yields drop sharply, the same math works in reverse and surpluses can shrink fast. Members also rarely see bigger cheques because their plan is in surplus. More often, the employer pauses its own contributions for a while.

The strength of the plan also does not protect your buying power. If your pension has limited or no cost of living increases, inflation can still erode what each payment buys. A pension backed by a strong plan is secure in dollar terms. How far those dollars stretch is a separate question, and one worth answering before you commit to a larger mortgage in retirement.