A further drop in federal bond yields halted improvements in the solvency financial positions of most Canadian pension plans through Q4, despite an October rebound in stock markets, according to the Mercer Pension Health Index. The index, which shows the ratio of assets to liabilities for a model pension plan, stood at 60% as of Dec. 31, 2011,, unchanged over the previous quarter and 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, Mercer’s retirement, risk and finance professional leader for Canada. “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.”
Clausen added that “most pension plans also experienced significant losses in 2011 on the accounting basis used for financial reporting and that the experience of the past year again points to the importance of an organization actively monitoring and managing its pension risk.”
According to Rob Stapleford, leader of Mercer’s Investment Consulting business in Central Canada, major stock indexes increased in the fourth quarter, led by a 9.3% increase in the U.S. market. The S&P/TSX index was up 3.6%, global developed stock markets increased 5.3%, and emerging markets jumped 2.1% for emerging markets. “However, for the full year, 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.”
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%, followed by mid-term bonds (10.9%) and short-term bonds (4.7%). During the year, overall bond yields (as measured by the DEX yields), started at 3.11%, reaching a high of 3.39% in April, and ended the year at 2.33%.