The solvency position of Canadian pension plans improved in the third quarter of 2012. The new Mercer Pension Health Index stood at 80 per cent on Sept. 30, up from 77 per cent June 30.
“Equity markets across the globe performed very well in the third quarter, although returns on foreign investments were held back somewhat by the strengthening Canadian dollar,” said Manuel Monteiro, partner in Mercer’s financial strategy group. “Strong returns boosted the index by two per cent with employer deficit funding adding the other one per cent. Unlike the second quarter, solvency liabilities were relatively stable as long-term government bond yields were virtually unchanged from June 30.”
While the third quarter was positive, the overwhelming majority of Canadian pension plans are still faced with significant solvency deficits, said Monteiro.
Plan sponsors should be planning for significant increases in cash funding requirements over the next few years. The increase in cash funding could be alleviated in some jurisdictions by the use of funding relief measures as well as letters of credit, said Mercer.
“To many plan sponsors, the pension plan feels like a tightening noose. With seemingly insurmountable problems, some have been tempted to stick with the status quo in the hope of better times. Some, however, are beginning to see the merit in a long-term strategy to gradually loosen the noose,” said Monteiro. “While pension volatility exposes sponsors to risk, it also provides opportunities to take steps to reduce this risk.”
Plan sponsors should develop a de-risking game plan in advance, he said.
A typical balanced pension portfolio returned 3.2 per cent in the third quarter which boosted the year to date return to 5.8 per cent.
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