Pension plans still healthy: Mercer

Over the past few months various reports have celebrated the strong health of pension plans, so it’s no surprise that Mercer Investment Consulting found similar results.

In a report titled “Survey of Canadian Institutional Pooled Funds,” the firm states that pension plans increased from 84% in early 2007 to 89% in June. “The funding ratio was brought back to levels not seen since the fall of 2004,” says the report.

Mercer says the increase can be attributed to rising long-term interest rates, which have lowered pension costs.

The report adds that the Canadian pooled balanced pension fund median return was 1.1% for the quarter and 2.8% for the last six months.

While this is positive news, Peter Muldowney, a worldwide partner at Mercer, says he’s surprised that active managers didn’t fare better. “I think the disappointment is still that we’ve not seen active management delivering strongly,” he says. “I recognize the trouble with the pooled fund survey is that we’re looking at reasonably nice returns, but they’ve been wiped out over the last month and a half. I’m looking at this and saying it’s disappointing that active managers haven’t provided value added.”

This extra value might show itself in the coming months, though, as the markets continue to fluctuate. “The challenge for me is to see whether or not the recent setback in markets will add value,” he says.

Helping pension plan health was an “impressive” return from Canadian equities. Over the past six months, the S&P/TSX Composite index returned 9.1%, while the median Canadian equity manager outperformed the benchmark by 0.9%. This past quarter, the composite index returned 6.3%, with the median return for equity managers at 6.5%.

Over the past six months, the top-performing sectors were telecommunications, industrials and information technology, which returned 26.7%, 19.4% and 16% respectively. Health care, utilities and financials had the unfortunate distinction of being the worst-performing sectors, with returns of -17%, 0.1% and 3.4% respectively.

When it comes to international and U.S. equities, the picture is less rosy. With the soaring Canadian dollar, returns that would have been in the high single digits in local currency end up falling flat after the exchange rate is factored in. The numbers in the first six months of the year saw the MSCI EAFE Standard index return 9.8% and the S&P 500, 7% in local currency. When converted to Canadian dollars, those numbers become 1.6% and -2.2% respectively.

Muldowney isn’t too concerned with these low returns. He says most plans focus on long-term investing and right now we’re only seeing short-term implications. “Long-term, we don’t expect a huge difference in returns,” he says. “The risk is very small, but still, over the short-term, it could be quite significant, as we’ve seen.”

The report also points out that the Scotia Capital Universe Bond Index has had a negative return of -0.8% over the past six months. The index is made up of short-term, mid-term and long-term bonds. The short-term aspect of the index was offset by negative mid-term and long-term returns, which posted numbers of -2.6% and -0.9% respectively. In this quarter short-term returns were -0.4%, mid-term, -2%, and long-term, -3.2%, while the overall index had a negative return of -1.7%.

As for the future, Muldowney can’t make any predictions. In fact, with the rapidly changing markets, this report is already out of date. “It changes by the hour,” he says. “But these are long-term commitments and people are investing with a long-term horizon.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com