Impressive market returns do little for Canadian pension plans

TORONTO, Oct 7 /CNW/ - Although financial market performance in the third quarter was stellar, the financial health of Canadian pension plans in the third quarter of 2010 did not improve much, due to a drop in federal bond yields. The Mercer Pension Health Index* stands at 68 per cent on September 30, up one per cent over the quarter.

"For the second straight quarter, long-term federal bond yields declined significantly, dropping 30 basis points during the quarter," said Paul Forestell, Retirement, Risk and Finance leader for Central Canada. "This resulted in higher pension liabilities measured on a solvency basis, decreasing the Index by about five per cent."

"On the other hand, the financial markets were up, with Canadian, US and international equity indices gaining between seven and twelve per cent in Canadian dollars over the quarter," said Yvan Breton, Leader of Mercer's investment consulting business in Canada.

A typical balanced portfolio would have returned 6.9 per cent for the third quarter of 2010. This return does not capture any impact from active management of any of the assets.

All major asset classes posted positive returns during the third quarter of 2010, with equities in general performing better than bonds.

Canadian equities, as measured by the S&P/TSX Composite index, returned 10.3 per cent in the last quarter.

• The best performing sectors for the quarter were Materials (+18.2%), Utilities (+15.5%) and Consumer Staples (+15.4%) according to the S&P/TSX sector indices. The worst performing sectors were Information Technology (-1.7%), Energy (+7.0%) and Financials (+7.8%).
  
  
• Small cap stocks returned 14.2 per cent (S&P/TSX SmallCap Index), outperforming large cap stocks (S&P/TSX 60 index) which returned 8.7 per cent during the third quarter.
  
  
• Growth stocks outperformed value stocks as shown by the S&P Canada BMI growth and value indices, which returned 11.5 per cent and 9.3 per cent respectively.

Canadian bond performance, as measured by the DEX Universe Bond index, returned 3.2 per cent in the last quarter, led by long-term bonds which gained 5.6 per cent, followed by mid-term bonds (3.8%) and short bonds (1.6%). During the quarter, overall bond yields (measured by the DEX Universe Bond index yields), fell from 3.08 per cent at the beginning of the third quarter to 2.80 per cent at the end of the quarter.

The Canadian dollar had a mixed impact on foreign equities during the third quarter of 2010.

• International equities, as measured by the MSCI EAFE (CAD) index, provided a return of 12.5 per cent in the third quarter. In local currency terms the MSCI EAFE returned 7.1 per cent over the same period.
  
  
• In the US, the S&P500 (CAD) returned 7.4 per cent in the third quarter. In US dollar terms, the S&P500 returned 11.3 per cent during the same period.
  
  
• Emerging markets, as measured by the MSCI Emerging Markets (CAD) index, returned 14.1 per cent in the third quarter.

For further information on the Mercer Pension Health Index, please visit: http://www.mercer.ca/referencecontent.htm?idContent=1395605

* The Mercer Pension Health Index shows the ratio of assets to liabilities for a model pension plan. The ratio has been arbitrarily set to 100 per cent at the beginning of the period. The Index assumes contributions equal to current service cost and no plan improvements. Assets: Passive portfolio with asset mix shown below.  Liabilities: 50 percent active members, 50 percent retired members; Canadian Institute of Actuaries transfer values (April 2009 standard after April 1, 2009) without the two-month lag for active members and annuity purchase proxy values for retired members. Results will vary by pension plan.

Asset mix: 42.5% DEX Universe Bond Total Return Index; 25% S&P/TSX Composite; 15% S&P 500 (CAD); 15% MSCI EAFE (CAD); 2.5% DEX 91 day T-Bills

About Mercer

Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer's investment services include investment consulting and multi-manager investment management. Mercer's 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit www.mercer.ca.

For further information:

Nancy Altilia
416 868 2364
[email protected]