The solvency position of most Canadian pension plans improved in the first quarter of 2012 on the back of good equity market returns and a slight increase in long-term federal bond yields, according to the Mercer Pension Health Index. The index—which shows the ratio of assets to liabilities for a model pension plan—stood at 63% on March 31, up 3% from the end of the previous quarter.
Scott Clausen, partner, retirement, risk and finance, with Mercer, attributed about 1% of the increase to a 15-basis-point jump in long-term federal bond yields over the quarter and the other 2% increase to positive investment returns. “Many plan sponsors are looking for an improvement in the health of their plans in 2012, after lacklustre investment returns and plummeting interest rates in 2011 brought funded ratios back down to 2008 levels. The improvement in the first quarter is a step in the right direction as companies continue to explore opportunities to reduce risk through various investment approaches and by managing plan design,” he said.
According to Rob Stapleford, leader of Mercer’s investment consulting business in Central Canada, global stock markets rose about 10% in Q1 of 2012, with emerging markets increasing about 12%. The Canadian market, in contrast, lagged other markets, returning 4.4%.
Bonds in general underperformed equities over the quarter. Canadian bond markets, as measured by the DEX Universe Bond Index, returned -0.2%, led by mid-term bonds (+0.04%) and short-term bonds (+0.03%), followed by long-term bonds, which returned -0.84%. During the quarter, overall bond yields (as measured by the DEX Universe Bond Index yields) started at 2.33%, fell to a low of 2.28% in February and reached a high of 2.6% in March, before settling at 2.48% at the end of the quarter.
A typical balanced portfolio would have returned 3.9% in the quarter. This return does not capture any impact from active management of any asset class.