Despite a rebound in stock markets in October, the solvency financial positions of most Canadian pension plans failed to improve in the fourth quarter due to a drop in federal bond yields, according to a Mercer report. As of Dec. 31, 2011, the Mercer Pension Health Index—which shows the ratio of assets to liabilities for a model pension plan—stands at 60%, down 13% on the year.
“Long-term federal bond yields dropped about 30 basis points in the quarter for a total drop of about 110 basis points on the year,” said Scott Clausen, retirement, risk and finance professional leader with Mercer. “This decrease in bond yields increased the cost of purchasing annuities and dropped the index by about 2% during the quarter. Positive investment returns bumped the index up by roughly 2%, resulting in a zero net change in the index over the quarter.”
“Stocks had negative returns, with Canada recording losses of 8.7% compared to losses of 2.7% in global developed markets and losses of 16.1% in emerging markets,” said Rob Stapleford, leader of Mercer’s investment consulting business in Central Canada. “Bonds performed well as a result of the decline in interest rates, which saw the yield on long-term federal bond yields go below 2.5%. Some funds diversified their asset mix into alternative investments such as real estate.”
A typical balanced portfolio would have returned 1.1% during 2011 and 3.4% in the last quarter of 2011.
Bonds were the best-performing asset class in 2011. Canadian bond markets (as measured by the DEX Universe Bond Index) returned 9.7% in 2011, led by long-term bonds, which gained 18.1%, and followed by mid-term bonds (10.9%) and short-term bonds (4.7%).