*Please note that we have enhanced our methodology for calculating and projecting liabilities to better reflect Canadian defined benefit (DB) pension plans. These changes have resulted in different metrics compared to earlier editions of Pension Barometer. Historical data has been updated as well, going back to December 2020.

Fixed income

Canadian bonds posted positive returns in Q3. The Canadian economy contracted in Q2, due largely to a sharp decline in exports caused by shifting U.S. tariff policies. Q3 brought a four-year high in the unemployment rate and further deterioration in the Canadian housing market. Meanwhile, the year-over-year inflation rate remained below the Bank of Canada’s target of 2%. Given the softer economic environment and lack of inflationary pressure, the Bank of Canada lowered short-term interest rates in September—the first rate cut in six months—to a three-year low of 2.5% for its benchmark interest rate. 

For the quarter, short- and intermediate-term Canadian bond yields declined, reflecting the Bank of Canada rate cut. However, long-term yields rose slightly amid continued concerns about the potential inflationary effects of U.S. tariff policy. On a sector basis, corporate bonds outperformed government bonds, led by the high-yield segment of the corporate bond market.

Equities

Canada’s stock market gained ground in September, boosting its return for the year-to-date period to over 22%. The S&P/TSX Index hit a series of all-time highs throughout the month, primarily due to an increasingly positive interest rate outlook. The Bank of Canada cut the policy rate by a quarter-point to 2.50%, its first reduction since it paused in March. The cut represents the eighth quarter-point reduction in the current cycle. In addition, market participants appeared to anticipate that further easing was in store over the year ahead. The U.S. Federal Reserve’s decision to enact a quarter-point cut of its own—its first in 2025—was an additional tailwind for sentiment. Together, these factors helped investors look past sluggish economic growth to bid stocks steadily higher over the course of the month. The resulting gains for equities were broad-based, with financials, energy stocks, and gold miners all making sizable contributions to the positive index return.

World equity markets delivered strong returns in Q3, with most major, broad-based indexes hitting a series of all-time highs. A favorable backdrop of positive global growth, falling interest rates across the developed markets, and a lack of pronounced negative news fueled a surge in investors’ appetite for risk. The U.S. market was a top performer amid renewed enthusiasm for the artificial intelligence theme and technology stocks more broadly. In addition, U.S. investors were cheered by positive corporate earnings reports and the relatively limited initial economic impact from tariffs. Emerging markets also performed very well, with China registering an impressive gain. On the other hand, Europe, while positive in absolute terms, lagged following H1’s stellar returns.

Canada yield curve (%)

Source: Bank of Canada, Macrobond, Manulife Investment Management, as of Thursday, October 2, 2025. 

In the third quarter of 2025, the average funded status improved to 128.4% from 121.9%, primarily due to strong global equity performance and a modest reduction in liabilities as long-term yields increased. This led to a healthier funded status, driven by both asset growth and liability reduction.

Please note that we have enhanced our methodology for calculating and projecting liabilities to better reflect Canadian DB pension plans. These changes have resulted in different metrics compared to earlier editions of Pension Barometer. Historical data has been updated as well, going back to December 2020.

Funded status (%) of average DB pension plan in Canada

Source: Manulife Investment Management as of September 30, 2025.

The average asset mix consists of growth, hedging, and diversifying assets, each serving a distinct function within the pension portfolio. This asset mix suggests an interest rate hedge ratio of 53.7%, relative to the interest rate exposure of the average liabilities.²

According to Manulife’s capital market assumptions, this average asset mix is expected to generate a long-term expected return of 5.7%. Additionally, based on Manulife’s modeling and stress testing, there is a 5% probability that an adverse outcome would result in a drop in funded status of more than 19.3%.

Source: Manulife Investment Management as of September 30, 2025.

Equity risk represents a large component of risk exposure for DB pension plans. Hence, a drastic downward move in equity prices has the potential to reduce a big portion of the surplus for the average DB pension plan. A decrease in interest rates also has the potential to negatively impact the surplus for the average DB pension plan, as it would lead to an increase in present value of liabilities.

Risk analysis of the average Canadian DB pension plan

In our model, a fair amount of risk is diversified away, and along with significant equity risk, the average pension plan also has exposure to interest rate risk, credit risk, and property risk.

Value at risk

Source: Manulife Investment Management as of September 30, 2025.

Solvency funded ratio of the average DB pension plan across various scenarios

Based on our scenario analysis, the median forecasted solvency funded ratio for the average Canadian DB pension plan is 129.6% in September 2026 and 153.7% in September 2035.

Source: Manulife Investment Management as of September 30, 2025.

We anticipate moderate global economic growth over the next two to three quarters due to tighter policy conditions and uncertainty persisting since early 2025. However, momentum might improve in 2026 as fiscal support strengthens, monetary policy eases in key markets, and businesses adapt better to the current environment. Fiscal policy will increasingly support growth, particularly as spending plans in major developed economies take effect and boost demand meaningfully. Monetary policy remains complex and regionally varied. The United States and Canada have entered the second phase of easing cycles, while the ECB may hold steady, and the Bank of Japan is signaling a gradual move toward policy normalization.

U.S. equity markets have rebounded strongly since April, driven by narrow leadership from large-cap technology firms. Much of this strength is tied to the ongoing momentum in AI, which continues to attract investor enthusiasm. Despite valid concerns around extended valuations, many AI-linked companies maintain strong fundamentals, including high return on invested capital. This supports continued investor confidence in the sector’s long-term growth potential. While this rally may eventually slow, current market dynamics favor maintaining exposure to U.S. tech-related stocks, especially those with direct ties to the AI ecosystem and innovation-driven business models.

Despite continued momentum in the AI trend, earnings expectations for 2026 are high across several sectors, pointing to a broader opportunity set moving forward. Exposure to cyclical and value-oriented areas with improving fundamentals and supportive macro conditions could benefit investors. A weakening U.S. dollar may act as a catalyst for global manufacturing, potentially supporting a bull market in international industrials and export-driven economies. While the United States remains resilient, select regions, e.g., Europe, show improving macro trends. In Asia, manufacturing and tech-export economies offer compelling opportunities, making regional positioning increasingly important amid global fragmentation and shifting capital flows.

1  Liability assumptions. 2 Asset assumptions.

Financial markets and their impacts on the pension industry are fast moving, and there's no one-size-fits-all approach. Our liability-driven investment team and Multi-Asset Solutions Team are here to help simplify markets and build strategies that work for you. Get in touch with us today to learn about how we can support your goals.