TORONTO The financial health of Canadian pension plans stumbled in the third quarter, according to the most recent Mercer Pension Health Index.
Its all about the foreign asset returns, said Paul Forestell, worldwide partner for Mercer in Toronto. Assets returns in general in the third quarter were poor. A typical balanced fund had a negative return for the third quarter. And a lot of that was driven by foreign assets because of the strong increase in the Canadian dollar. When you translate the returns into Canadian dollars, they were negative.
The index which was released on Oct. 9, is still up 3% for the year, mainly because long-term interest rates are holding steady at higher levels than at the end of 2006, and because pension funds produced modest positive growth during the first nine months of the year. Mr. Forestell maintains plans are better now than they were in January.
(The Mercer Pension Health Index, which shows the ratio of assets to liabilities for a model pension plan, reflects the impact of capital markets on the funding levels of Canadian pension plans.).
If the dollar just stays where it is and doesnt increase significantly from the level where its at now, its already captured in the health of the plans, he said. So, the high dollar will not affect returns on pension fund assets.
However, he acknowledged that the increasingly high loonie is having an impact on Canadian manufacturers, which would have a consequential impact on the Canadian stock markets per performance of Canadian companies.
A typical balanced portfolio of investments would have returned
-0.1% for the third quarter of 2007 and 1.7% for the nine months ended Sept. 30, according to the Mercer report.
Returns have been below expectations, said Mr. Forestell. A typical (pension) fund would have been expecting a 6.5% to 7% return for the year and 1.7% is obviously a fair bit below that assumption In all aspects, it would be a disappointing year, so far, for pension plans.
Canadian equities was the best performing asset class in the balanced portfolio during the third quarter of 2007, with the S&P/TSX Composite index returning 2%; for the year to date, it returned 11.2%.
The Scotia Capital Universe Bond index returned 1.7% for the third quarter and 0.9% for the year to date.
October, to date, has been fairly strong. The fourth quarter last year was very strong, said Mr. Forestell. What has been positive for plans, year to date, is that bond yields are up 35 to 40 basis points since the end of the year, which has lowered the liabilities for pension plans in Canada. And thats why our index is still up a fair bit over the course of the year, even though asset rates have been disappointing; thats all because of the increase in interest rates.