TORONTO — Canadian asset managers did well in 2004, but pension fund liabilities remained at 2003 levels, according to reports from Mercer Investment Consulting and Mercer Human Resource Consulting.
The boost was due, in part, to strong returns of the markets and fund managers.
The quarterly survey of pooled investment funds available to Canadian pension plans from Mercer Investment Consulting shows how active managers did in comparison to the indexes. "Pooled funds are a nice little quick check of how returns have actually been," said Peter Muldowney, principal at Mercer Investment Consulting in Toronto.
Among results seen in the fourth quarter survey, all major asset classes posted positive returns for the quarter and calendar year, with Canadian equities leading the way. The S&P/TSX Composite index returned 7.2% for the fourth quarter and 14.5% for the entire year.
Particularly strong were Canadian midcap equity funds, with a fourth-quarter return of 9.6% and a year-end return of 22.8%.
"The noteworthy observation for the last two years has been international equity," said Mr. Muldowney. "What we saw there was the managers actually struggled, and historically … the international equity (non-North America) would typically be an area where active management would be rewarded."
The weakest asset class, according to the survey, was U.S. equities, with the median U.S. equity fund manager matching the Standard & Poor's 500 index for the year at 2.8% (in Canadian dollar terms) and outperforming the S&P 500 by 40 basis points, at 3.4% for the quarter (again in Canadian dollar terms). The relatively weak performance of U.S. equities is attributed to the continuing weakening of the U.S. dollar. Most Canadian pension plans hedge little of their foreign portfolios.
Despite the strong returns of their managers, Canadian plans are still struggling with funding issues.
According to Mercer Human Resource Consulting's Canadian Pension Health index, the ratio of assets to liabilities remained at 89% at year-end 2004, the same as a year earlier.
Declining long-term interest rates held pension plans back, according to Paul Purcell, Canadian retirement practice leader at Mercer Human Resource Consulting, Toronto.
"Unless long-term interest rates increase, pension liabilities are going to be very high and the majority of pension plans will remain in deficit. But who knows where long term is going to go?" said Mr. Purcell. "We did an estimate where (Canadian pension plan) assets would be (at the end of 2004) based on market returns and assumptions of what they invested in, and we looked at long-term interest rates. We looked at estimated assets vs. estimated liabilities. Over 70% are in deficit as of the end of 2004."
