Pension Health Index Reveals Level First Quarter

Canadian pensions’ solvency ratio holds steady through Q1.

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The solvency position of Canadian defined benefit pension plans remained level through the first quarter of 2017, according to Mercer’s latest pension health index.

The index, which represents the median solvency ratio of a hypothetical plan, held steady at 102 per cent as of Mar. 30, 2017, and the median solvency ratio of Mercer’s clients’ plans remained unchanged from the beginning of the year at 93 per cent.

Pension funds benefitted from a strong performance in the equity market: Canadian equities saw a return of 2.6 per cent in the quarter. Utilities (7.3 per cent) and consumer discretionary (7.3 per cent) performed the best, while the health care and energy sectors experienced notable declines (-10.1 per cent and -5.7 per cent, respectively).

The Canadian dollar appreciated slightly against the U.S. dollar and depreciated against both the British pound and the euro. Foreign equities outside of the United States, therefore, performed well for Canadian investors: international equity returns were strong (6.9 per cent in Canadian dollars), as were emerging market returns (11.8 per cent in Canadian dollars). U.S. equity returns, on the other hand, were 5.1 per cent in Canadian dollars.

Pension funds were hurt by a drop of eight basis points in long-term interest rates and an increase in the estimated cost of buying annuities.

“We expect that many pension plan sponsors will bank their recent gains and reduce risk exposure by moving away from equities into bonds and alternative assets,” said Manuel Monteiro, leader of Mercer Canada’s financial strategy group, in a release. “We also expect 2017 to be a breakout year for the group annuity market with many sponsors choosing to transfer risk through annuity transactions.”

The index noted a typical balanced pension portfolio would have returned 3.7 per cent during the first quarter of the year.

According to the index, plan sponsors are worried about turbulent equity markets in the near future: global geo-political risks and anti-globalization sentiments remain at the forefront and, in the U.S., the Republicans’ failure to pass new health-care regulation casts more doubt on whether President Trump’s administration will follow through on election promises of lower taxes, less regulation and large stimulus programs.

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