Canadian pension plans experienced a rough third quarter as a result of market volatility and the credit crisis.

Mercer’s passive portfolio, representing the typical Canadian balanced portfolio of investments, returned -7.9% during Q3.

This was the worst quarter in exactly 10 years for the typical balanced fund. The passive portfolio produced a return of -9.1% in the third quarter of 1998, which was during the Russian financial crisis and when hedge fund Long-Term Capital Management was on the verge of collapsing.

“A slight increase in long-term interest rates over the quarter eased some of the pressure on the cost of funding pensions, especially for those plans that provide automatic increases to pensions in line with inflation,” explains Paul Forestell, retirement professional leader at Mercer, “but not by enough to counteract the overwhelming impact of the fall in equity markets in September.”

The Mercer Pension Health Index, which measures the ratio of assets to liabilities, is now at 72%—falling below its previous low of 77% and its lowest point since inception in 1998.

Still, the funded status of most pension plans as shown in corporate financial statements will likely have held steady over the quarter, as widening credit spreads have pushed up corporate bond yields in September, notes Forestell. “If credit spreads revert to lower levels, funded status for accounting purposes will decline.”

During the quarter, all major asset classes posted negative returns. Canadian fixed income was the best performing asset class last quarter, with the DEX Universe Bond index returning -0.4%

U.S. equities was the second best performing asset class of the quarter, with the S&P 500 returning -4.0% in Canadian dollar terms. This was the first quarter since the end of 2006 that U.S. equities (in Canadian dollar terms) outperformed Canadian equities, as reflected by their respective indices. The Canadian dollar return of the S&P 500 was boosted by the sharp weakening of the Canadian dollar against the American dollar.

International equities followed far behind with the MSCI EAFE returning -16.7% in Canadian dollar terms. Canadian equities was the poorest performing asset class during the third quarter with the S&P/TSX returning -18.2%.

Copyright © 2020 Transcontinental Media G.P. Originally published on

Join us on Twitter