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Pension Funds

Canada plans’ funding levels hurt by fourth-quarter equity rout

Canadian public and corporate pension plans' median funding levels plunged in the fourth quarter, hurt by a decline in equity investments, according to two reports.

Mercer (Canada) said its Canadian corporate and public pension plan clients had a median 95% funding level as of Dec. 31, down from a record high of 102% at the end of the third quarter and 97% at the end of 2017, according to Mercer's Pension Health Index report.

The Mercer index, which tracks the typical Canadian defined benefit plan based on 100% funding as of Jan. 1, 1999, ended 2018 at 102% funded, down from 112% at the end of the third quarter and 106% as of Dec. 31, 2017.

In a separate report, Aon Hewitt Investment Consulting said the median funded status of Canadian DB plans was 95.3% as of Jan. 1, compared to 103.2% as of Sept. 30 and 99.2% at the end of 2017. Also, 38.5% of plans were fully funded as of Jan. 1, compared to 58.4% three months earlier and 46% a year earlier.

Mercer's third-quarter funding level had been the highest since November 2000, while the quarter saw Aon Hewitt's highest funding level since it began measuring median funding in 2002.

Mercer said a typical balanced pension portfolio would have decreased by 3.8% in the fourth quarter. Canadian equity returned -10.1%, while Canadian long-term bonds rose 1.9% and overall Canadian fixed income rose 1.8%.

In Canadian dollar terms, Mercer said, U.S. equity lost 8.6% in the latest quarter, while international equities were down 8.4%. Emerging markets equity slipped 2.2%.

"Canadian pension plans took a significant hit in the fourth quarter, but thankfully they were starting from a very strong position" Manuel Monteiro, partner and head of the financial strategy group at Mercer (Canada), said in the report.

In the Aon Hewitt report, Calum Mackenzie, partner and head of investment, Canada, said declining Canadian bond yields and negative equity returns in the last quarter were "a double whammy for pension plan financial health. We don't expect the volatility to end in 2019, but pension plans' financial positions remain strong after the longest bull run in history."