Recovering equity markets and rising interest rates combined to nudge the overall health of pension plans upward this past quarter, according to Mercer.
The Mercer Pension Health Index—which shows the ratio of assets to liabilities for a model pension plan—increased to 74%, up 1% from the beginning of the fourth quarter and 15% from the same time last year.
“Both domestic and foreign equity markets had solid gains in the fourth quarter, capping off a terrific year for equities as they rebounded from the market crash in the fourth quarter of 2008 and first of 2009,” says Yvan Breton, leader of Mercer’s investment consulting business in Canada. “However, the continued strengthening of the Canadian dollar offset much of the return on foreign equity investments.”
Mercer expects the funded ratio of pension plans to drop by a few percentage points compared to 2008, as the widening of credit spreads between yields on government and high-quality corporate bonds in the fall of 2008 was largely reversed in 2009. This may result in higher reported pension obligations, offsetting the year’s investment gains.
“An increase in federal bond yields in the fourth quarter reduced the solvency liabilities resulting in a one per cent gain in the index,” says Paul Forestell, retirement, risk and finance business leader for central Canada. “However, despite the large investment gains and significant contributions made by plan sponsors over the year, we estimate that more than half of pension plans in Canada remain less than 80 per cent funded on a solvency basis at the end of 2009.”
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