Pension solvency continues to slip despite increase in returns: report

Diversified pooled pension fund managers posted a median return of 4.4 per cent before management fees for the third quarter of 2016 and a median year-to-date return of 6.8 per cent, according to a new report by Morneau Shepell.

But while fund managers outperformed the report’s third quarter benchmark of between 4.1 and 4.3 per cent for diversified portfolios, the solvency ratio of the average pension plan fell by about 2.2 per cent, according to the report.

The market produced fairly high returns for pension funds from both Canadian equities and global equities, according to Jean Bergeron, managing partner of Morneau Shepell’s asset management practice. “Canadian equities had strong growth again, with the S&P TSX Index posting 5.5 per cent for the quarter and 15.8 per cent since the beginning of the year,” said Bergeron in a release. “Global equities also had high returns for the quarter, with the MSCI World Index posting 6.1 per cent.”

But, the market’s optimistic results were not enough to offset the lackluster performance of long-term bonds, says Serge Charbonneau, a partner and actuary at Morneau Shepell.

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Low interest rates from government bonds have been a problem for pension funds for years, says Bergeron. “The dropping interest rates have increased the liabilities more than the value of assets, so even if you get good returns,  because interest rates have gone down quite a bit, it has a bigger impact on your pension liabilities.”

Bergeron adds though that interest rates can fluctuate significantly over a short period of time. “No one is doing an actuarial valuation at the end of October. Normally pension plans do valuations at the end of December, so if rates go up for the next couple of months, we may see improvement in solvency ratio by the end of year.”

So far this year, the yield on government bonds has dropped by 0.36 per cent, notes Bergeron. As of yesterday, the yield for a 30-year Government of Canada bond was 1.81 per cent.

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Morneau Shepell’s report shows that Canadian bonds produced a median return of 1.5 per cent in the third quarter of 2016, while bonds with a universe mandate produced an average return of 1.4 per cent.

During the same period, long-term bonds returned 2.4 per cent, medium-term bonds returned 0.9 per cent and short-term bonds returned 0.5 per cent. High-yield bonds posted 5.7 per cent, while real return bonds saw a 1.9 per cent return.

According to the report, Canadian equity managers reported a median return of 5.8 per cent while foreign equity managers reported a median return of 5.1 per cent for U.S. equities, 7.7 per cent for international equities, 6.0 per cent for global equities and 9.5 per cent for emerging market equities.

As for alternative investments, the report showed a return of 3.3 per cent according to the Dow Jones Credit Suisse Hedge Fund Index.

The report covers about 324 pooled funds that have a market value of more than $264 billion, managed by nearly 49 investment management firms.

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