Amid concerns of a global economic slowdown, Canadian pension plans experienced significant losses on both sides of the balance sheet in the third quarter of 2011, according to the Mercer Pension Health Index.
The index measures the ratio of assets to liabilities for a model pension plan. It stood at 60% on Sept. 30, down from 71% at June 30.
“Long-term federal bond yields dropped about 80 basis points in the quarter, continuing the decline started in the previous quarter,” said Scott Clausen, Mercer’s retirement, risk and finance professional leader for Canada. “This decrease in bond yields dropped the index by about 8%. The remaining 3% decline in the index is due to investment returns.”
Additionally, Canadian stocks fell by 12% in the third quarter, due mainly to global economic uncertainties, according to Rob Stapleford, leader of Mercer’s Investment Consulting business in central Canada. “Five out of the 10 TSX sectors posted double-digit declines during the quarter, with information technology and energy being the worst performers (-18.7%). Only utilities and telecom services showed positive performance. Global equity markets declined substantially, but the decline was offset, in part, by weakening in the Canadian dollar.”
Bonds were the only asset class that posted a positive return compared with equities during the quarter. Canadian bond markets, as measured by the DEX Universe Bond Index, returned 5.1%, led by long-term bonds (which gained 9.8%), followed by mid-term bonds (5.9%) and short-term bonds (2.3%). During the quarter, overall bond yields (as measured by the DEX Universe yields) fell from 3.04% at the beginning of the quarter to 2.41% at the end of the quarter.
Clausen comments that this market volatility illustrates the importance of monitoring the funded status of individual pension plans on a regular basis.