Canadian Pension Plans Are so Healthy that Employers Are Taking a Contribution 'Holiday,' Says Mercer

Why It Matters

The surge in pension surpluses lets employers pause contributions, freeing cash in a volatile economy, but extended pauses risk weakening retirement security if markets turn.

Key Takeaways

• Median solvency ratio reached 123% Q1 2026
• Contribution holidays triggered by surplus thresholds under tax law
• 60% of plans above 120% solvency; 13% deficit
• Market volatility could quickly erode surplus buffers
• Employers pause contributions to conserve cash amid uncertainty

Pulse Analysis

The latest Mercer Pension Health Pulse shows Canadian defined‑benefit pension plans in unprecedented shape, with a median solvency ratio of 123 percent at the end of the first quarter of 2026. That means every dollar of promised benefits is backed by $1.23 in assets, a sharp rise from just over 80 percent in 2020 and a peak of 132 percent last year. The surge was driven largely by strong equity returns in 2025, as soaring stock markets lifted plan assets faster than liabilities grew, leaving many funds with sizable excesses.

Under the Canadian Income Tax Act, once a plan’s surplus crosses a prescribed solvency threshold, employers may be forced into a ‘contribution holiday,’ pausing further funding until the surplus falls below the limit. Mercer reports that about 60 percent of plans now sit above the 120 percent mark, prompting a wave of mandatory pauses. For employers, the holidays offer short‑term cash‑flow relief, especially as they navigate economic uncertainty and higher operating costs. However, extended holidays combined with a market downturn could deplete the buffer that currently protects retirees’ benefits.

The durability of today’s surplus is far from guaranteed. Mercer warns that geopolitical shocks—such as the recent U.S.–Israel‑led conflict in Iran—and ensuing market volatility can quickly reverse gains, as seen when the S&P 500 slipped nearly four percent since February. A prolonged contribution freeze during a bear market could push more plans into deficit, raising funding pressures for both sponsors and beneficiaries. Policymakers and plan trustees will need to monitor solvency trends closely, balancing the desire for fiscal flexibility with the long‑term security of Canada’s pension system.