By Angela Marion Lee
TORONTO The financial health of Canadian pension plans continued to strengthen in the first half of 2007, adding to the improvement made in 2006, according to Mercer Human Resources Consulting.
The Mercer Pension Health index, a funding level indicator that measures the impact of capital markets on the health of Canadian pension plans, increased three percentage points from the end of 2006.
Since the end of 2006, interest rates have increased by about 50 basis points, said Paul Forestell, principal at Mercer in Toronto. A 50-basis-point increase would lower the liabilities of a pension plan by about 5(%) to 10%. Higher interest rates mean that pension plans cost less; thats the bottom line. A 50-basis-point increase has been quite welcome by pension plans in Canada.
The Pension Health index increased to 89% at the end of June from 86% at the start of 2007 and 84% two years earlier. The funded ratios of many plans would have improved by a greater margin than suggested by the index because it does not take into account contributions many sponsors would have been making over the past few years, added Mr. Forestell.
The rising dollar has had a negative impact on foreign investment by Canadian pension plans; it also prevents interest rates from rising further, he said. But DB pension plans are less expensive today than they were on Jan. 1 and higher interest rates for DC plans provide more pension for the same amount of money.
If interest rates hold steady, most defined benefit plans in Canada will be close to being 100% funded by the end of the year, according to Mr. Forestell.
Canadian equities were by far the best performing asset class in the second quarter, with the S&P/TSX Composite index, Canadas benchmark indicator, returning an impressive 9.1%. Domestic small-cap stocks returned 12.8%, according to the BMO Nesbitt Burns index, outperforming domestic large caps, which returned 8.8% as measured by the S& P/TSX 60 index.
Domestic growth stocks slightly outdid value stocks according to the S&P/Citigroup BMI total return growth and value indexes, which returned 9% and 8.9% respectively.
In local currency terms, the Morgan Stanley Capital International Europe Australasia Far East index returned 1.4% and the S&P 500 returned -2.4% because of the strength of the Canadian dollar.
In bonds, the Scotia Capital Universe Bond index returned -0.8% over the six months to June 30.