Brexit Fears Hit Canadian Plans

1193473_dark_euro_3The solvency ratio of a typical Canadian pension plan has fallen by almost three per cent since the majority of Britain voted to leave the European Union last week, according to the Mercer Pension Health Index.

The median solvency ratio of the pension plans of Mercer clients stood at 82 per cent on June 27, 2016 down from 85 per cent at the beginning of the year and from 85 per cent just before the Brexit vote.

“The Brexit vote has clearly increased the level of geo-political and economic uncertainty – which probably means increased volatility for pension plans for months if not years to come,” said Manuel Monteiro, leader of Mercer’s financial strategy group. “Pension plan sponsors should ensure they remain comfortable with their current risk exposure.”

Notwithstanding the quarter-ending ‘panic,’ a typical balanced pension portfolio would have returned 0.6 per cent during the second quarter of 2016, according to Mercer.

“Canadian equities were the best performing broad equity asset class for the second quarter in a row, with a return of 2.1 per cent over the quarter,” said Brian Dayes, partner at Mercer Investments. “The outperformance was led by materials (24.2 per cent) as commodity prices rebounded by 11.1 per cent during the period, and gold was sharply higher following the Brexit vote.”

Mercer’s index also showed that despite the oil sell-off late in the quarter, the energy sector rose 4.6 per cent during the quarter. On the other hand, the health-care sector continued to suffer (-19.1 per cent), which was driven primarily by Valeant Pharmaceuticals.

U.S. equity returns were modestly down in USD (-2.4 per cent), according to Mercer. A Canadian investor would have a loss of -1.1 per cent in CAD terms owing to the strength of the USD following the Brexit vote. The CAD gained 7.9 per cent against the British pound and 2.5 per cent against the euro, the majority of it following the results of the Brexit vote.

International equities underperformed as the MSCI EAFE returned -5.3 per cent in local currency terms and
-5.4 per cent in CAD. Emerging markets also underperformed and returned -2.4 per cent in local currency terms and -2.9 per cent in CAD.