Equity volatility exerts mild impact on pension plan health in first quarter

The recent volatility in the equity markets has had only a mild impact on the heath of Canadian pension plans so far this year, according to new numbers from Mercer.

On Monday, the firm released its quarterly update on the funded status of Canadian defined benefit plans. The median solvency ratio of Mercer clients was 98 per cent as of March 30. That was up from 97 per cent at the end of 2017.

Equity volatility, which was particularly significant in early February, had only a mild impact on plan health, according to Mercer. Helping to boost plan funding levels was a small rise in long-term interest rates, the firm noted.

“The funded position of a typical Canadian defined benefit pension plan remains up almost 20 per cent since the November 2016 U.S. election,” said Manuel Monteiro, leader of Mercer’s financial strategy group.

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A typical balanced portfolio would have declined by 0.5 per cent during the first quarter of 2018, according to Mercer. When it comes to Canadian equities, all sectors, with the exception of information technology and real estate, saw a negative performance during the first quarter. For U.S. equities, the decline in the value of the Canadian dollar helped to keep returns positive at 2.1 per cent for plans with unhedged investments. Unhedged international equities, meanwhile, returned 1.4 per cent.

As for fixed income, the market was relatively flat, according to Mercer.

“We have observed a heightened level of volatility in the markets over recent periods,” said Sofia Assaf, principal and senior investment consultant at Mercer.

“Investors are showing sensitivity to headwinds of tighter monetary policy, trade protectionism and geopolitical uncertainty, and we anticipate volatility to ensue over 2018 as a result.”

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