Canadian pension plans are so healthy that employers are taking contribution holidays, but the good times may not last, says human resources consultant

Mercer (Canada) Ltd. “Surpluses have been increasing over the past couple of years and when the surpluses get large enough, some clients actually find themselves in a position where a contribution holiday is mandatory,” Samantha Allen, a principal at Mercer, said.

Contribution holidays can be required under the Canadian Income Tax Act when the surplus in a plan reaches a certain solvency threshold. At that stage, she said employers are required to pause contributions and are restricted until the surplus drops below that level.

The current median solvency ratio — a measure of the health of pension plans — was 123 per cent at the end of the first quarter of 2026, according to the Mercer Pension Health Pulse (MPHP), which tracks the assets and liabilities of 435 defined-benefit pension plans on a quarterly basis.

That means for every dollar of pension owed to recipients, $1.23 is available.

The median solvency ratio of the MPHP has been steadily rising since 2020, when it was a bit more than 80 per cent, and hit a peak of 132 per cent at the end of last year.

Soaring stock markets helped improve the health of pension plans in 2025, when the solvency ratio increased by seven per cent on strong equity returns.

Almost 60 per cent of plans posted a solvency ratio of 120 per cent or more in the first quarter of 2026 and 13 per cent were in a deficit, Mercer said. That compared with 68 per cent of plans with a solvency ratio above 120 per cent at the end of 2025.

Mercer attributed the solvency ratio drop to “recent valuations” and the contribution holidays, a trend it expects will continue through 2026.

Stocks have slumped due to the chaos caused by the United States-Israel-led attack on Iran. The S&P 500 is down almost four per cent since the start of the war on Feb. 28. Falling markets didn’t factor into the lower solvency ratio in the first quarter, with Mercer saying slightly lower returns on investments were balanced out by a drop in liabilities.

However, there were other drivers behind the contribution holidays besides plans being overfunded.

“Some (employers) may have been putting in a lot of money in recent times when they had deficits and may be taking a pause,” Brad Duce, a principal at Mercer, said. “And there may be employers out there that see the uncertainty in the economy and have the opportunity to manage their cash flow a little bit more conservatively and aren’t committing it to the plan at this point in time when there’s already a surplus that exists.”

  • Canadian pension plans are flush with record surplus on soaring stock market returns, Mercer says
  • Taxpayers, check your drawers: nearly $2 billion in government cheques remain uncashed

Mercer also said it has seen the financial health of some pension plans deteriorate “quickly in past crises.”

Allen said geopolitical upheaval and market volatility can impact the assets and liabilities of pension plans.

“A one-year contribution holiday might not have much immediate impact, but longer contribution holidays combined with a market downturn could impact the current buffer that a lot of these plans currently have,” she said.