Plans squeezed by negative equity returns, declining bond yields
The financial health of Canadian pension declined significantly at the end of the first quarter of 2008, to levels not seen since the middle of 2005, according to a report from Mercer.
“Equity returns were negative in Canadian dollar terms in almost all regions for the second quarter in a row,” said Peter Muldowney, business leader for Mercer’s investment consulting business in Canada. “This meant the asset side of the Canadian pension plan balance sheets continued to take a pounding in the first quarter of this year.”
The Mercer Pension Health Index, which measures the solvency funded status of plans, reached its lowest point on March 31, falling to 77 per cent from 82 per cent in December, 90 last summer and 120 in late 2000.
“With liabilities increasing due to a continued decline in long-term government bond yields, the health of Canadian pension plans was squeezed on both sides,” said Paul Forestell, retirement professional leader at Mercer.
“However, due to widening credit spreads between government and corporate bond yields, funded status for pension accounting purposes has likely improved over the quarter for most pension plans."
A typical balanced portfolio of investments would have returned -1 per cent for the first quarter of 2008. This return does not capture any impact from active management of any of the assets.
Canadian bonds were the best performing asset class in the first quarter of 2008, with the DEX Universe Bond index returning 3.0 per cent, while Canadian equities returned -2.8 per cent.
The best performing sectors were materials and energy, returning 7.3 per cent and 1.2 per cent respectively. The worst performing sectors were consumer discretionary (-14.3 per cent), telecommunication services (-12.0 per cent) and financials (-8.6 per cent).
The Mercer Pension Health Index shows the ratio of assets to liabilities for a model pension plan.
“Equity returns were negative in Canadian dollar terms in almost all regions for the second quarter in a row,” said Peter Muldowney, business leader for Mercer’s investment consulting business in Canada. “This meant the asset side of the Canadian pension plan balance sheets continued to take a pounding in the first quarter of this year.”
The Mercer Pension Health Index, which measures the solvency funded status of plans, reached its lowest point on March 31, falling to 77 per cent from 82 per cent in December, 90 last summer and 120 in late 2000.
“With liabilities increasing due to a continued decline in long-term government bond yields, the health of Canadian pension plans was squeezed on both sides,” said Paul Forestell, retirement professional leader at Mercer.
“However, due to widening credit spreads between government and corporate bond yields, funded status for pension accounting purposes has likely improved over the quarter for most pension plans."
A typical balanced portfolio of investments would have returned -1 per cent for the first quarter of 2008. This return does not capture any impact from active management of any of the assets.
Canadian bonds were the best performing asset class in the first quarter of 2008, with the DEX Universe Bond index returning 3.0 per cent, while Canadian equities returned -2.8 per cent.
The best performing sectors were materials and energy, returning 7.3 per cent and 1.2 per cent respectively. The worst performing sectors were consumer discretionary (-14.3 per cent), telecommunication services (-12.0 per cent) and financials (-8.6 per cent).
The Mercer Pension Health Index shows the ratio of assets to liabilities for a model pension plan.
