Canadian pension plan funding dips in 2010

Janet McFarland, The Globe and Mail


Canadian AA Follow this Canadian pension plans saw their funded status drop in 2010 despite posting strong gains in the fourth quarter, according to pension consulting firm Mercer. The Mercer Pension Health Index showed a typical Canadian pension plan was 73-percent funded at the end of 2010, down from 74 percent a year earlier, but up sharply from 68 percent at the end of September.

The index measures the ratio of a model pension plan’s assets to its liabilities assuming a typical portfolio mix of stocks and bonds. While stock markets posted strong returns in 2010, pension plans saw their funded status pulled down because of lower bond yields, which are used to measure the value of pension funds’ liabilities. It meant pension funds earned more on their assets in 2010, but saw their benefit obligations rise almost as much.

“Over the year, strong asset performance was offset by the overall drop in long-term federal bond yields,” said Scott Clausen, professional leader for Mercer’s retirement practice in Canada. He said many companies faced requirements to contribute money to their pension plans last year to improve their funding. “Any increase in the actual funded status of pension plans in 2010 is likely due to employers pouring cash into their plans,” Clausen said in a statement. Mercer anticipates many companies will report a weaker funded ratio for their pension plans in their year-end financial statements, despite any cash contributions made during the year, because the drop in bond yields was so significant in 2010.

The positive news for pension plans, however, is that funding has been improving since the end of September with stronger stock markets combined with better bond yields. Yvan Breton, who heads Mercer’s investment consulting business, said the typical pension plan earned a return of almost 4 percent in the fourth quarter alone. “Stocks delivered another strong performance in the fourth quarter and in 2010 overall, both domestically and abroad,” he said.

A typical pension fund with a balanced portfolio earned 9.2 percent in 2010, based on a passive index investing strategy. Canadian stocks were the best-performing asset class, with a return of 17.6 percent, while Canadian bonds earned 6.7 percent in the year.
Gains on foreign stocks were offset by improvements in the strength of the Canadian dollar. In local currency terms, for example, international equities posted a return of 5.3 percent, but that was reduced to 2.6 percent in Canadian dollars, Mercer said. The U.S. S&P 500 Index was up 15.1 percent in 2010, but just 9.1 percent when converted to Canadian dollars.