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Pension Funds

Canadian pension plans see funding improvements in third quarter — 2 reports

Canadian corporate and public defined benefit plan funding rose in the third quarter, boosted by strong equity performance and higher bond yields, according to two reports

A Mercer report said the median Canadian DB plan was 97% funded as of Sept. 29, up from 93% at the end of the second quarter. Separately, Mercer's pension health index, which tracks the typical Canadian defined benefit plan based on 100% funding as of Jan. 1, 1999, was 106% at the end of the third quarter, up from 103% at the conclusion of the previous quarter.

In a separate report, Aon Hewitt Investment Consulting said Canadian plans were a median 99.3% funded as of Monday , compared with 94.8% three months earlier. Also, 47.7% of Canadian plans were fully funded as of Monday , up from 37% of plans as of June 30.

Benchmark bond yields rose in the third quarter, with Canadian 10-year yields up 35 basis points and Canadian long bond yields up 34 basis points, according to Aon Hewitt.

"Rising interest rates are good news for Canadian pensioners and the plans they will rely on in retirement, and so there was plenty of good news for them in the third quarter, as most Canadian DB pension plans experienced marked improvements in financial health," said William da Silva, senior partner and retirement practice director at Aon Hewitt.

Manuel Monteiro, partner and head of the financial strategy group at Mercer (Canada), said in a separate news release that the rise in interest rates decreased pension liabilities by 3% to 5% over the quarter. However, investment gains in the third quarter were partially offset by the negative impact of the surging Canadian dollar on unhedged foreign assets, Mr. Monteiro added. The typical plan hedges about 40% of its interest rate risk through its investment strategy, according to Mercer.

"Canadian DB pension plans remain in strong financial shape," Mr. Monteiro said. "However, the strength of the Canadian dollar has resulted in a wide disparity in the funded status of pension plans, depending on their currency hedging strategy."

For the latest quarter, U.S. equity returned 4.5% in U.S. dollar terms but only 0.6% in Canadian dollar terms. International equities returned 3.4% in local currency and 1.6% on a Canadian dollar basis, according to Mercer.