The financial health of Canadian pension plans declined in the first quarter of the year to levels not seen since the middle of 2005, according to the Mercer Pension Health Index.

The index, which measures the solvency funded status of plans, fell to 77% at the end of March, down from 82% at the end of 2007.

Equity returns were negative in Canadian dollar terms in almost all regions for the second quarter in a row. Canadian equities returned -2.8% while international and U.S. equities returned -5.2% and -5.9%, respectively, during the first quarter.

Canadian bonds was the best performing asset class in the first quarter of 2008, with the DEX Universe Bond index returning 3%.

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“With liabilities increasing due to a continued decline in long-term government bond yields, the health of Canadian pension plans was squeezed on both sides,” says Paul Forestell, retirement professional leader at Mercer. “However, due to widening credit spreads between government and corporate bond yields, funded status for pension accounting purposes has likely improved over the quarter for most pension plans.”

A typical balanced portfolio of investments would have returned -1.0% for the first quarter of 2008. This return does not capture any impact from active management of any of the assets.

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