Client pensions benefit from stock rally

By Jody White | July 6, 2009 | Last updated on July 6, 2009
2 min read

One of the key elements to many clients’ retirement plans has been given a boost. Canadian pension funds are breathing a little easier lately thanks to marginal but steady improvements in equity returns and bond prices, according to Mercer’s Pension Health Index.

Pension funds are benefiting from the same strong equity returns that have boosted retail mutual funds over the past three months. [read: Weak loonie boosts fund returns, sales sag]

As equities continue the long rally from the depths of March’s lows and Federal bond prices drop, pension plans are feeling less pressure on their solvency liabilities. The Mercer Pension Health Index increased to 71%, up 9% from the beginning of the second quarter and up 12% since the start of the year.

“The Canadian equity market outperformed its U.S. and international counterparts with the S&P/TSX Composite earning a strong 20% return, while a decline in the U.S. to Canadian dollar exchange rate partially offset the returns on U.S. equities,” says Yvan Breton, leader of Mercer’s investment consulting business in Canada. “Overall, second quarter gains on pension plan assets bumped up the index by about 6%.”

According to Paul Forestell, professional leader for Mercer’s retirement, risk and finance business, the increase in federal long-term bond yields through April and May and the drop in solvency liabilities accounted for approximately 3% of the upswing in the index. “Conversely, corporate AA bond yields dropped substantially in May and June, resulting in an increase in the pension liabilities that companies report on their financial statements,” he says.

Mercer states that a typical balanced pension portfolio would have returned 5.6% for the first half of 2009, and 8.9% for the second quarter. However, this return does not capture the impact from active management of any of the assets.

Canadian equity was the best performing asset class both for the year to date, and the second quarter. The S&P/TSX returned 17.6% for the last six months and 20% for the last quarter.

So far, the best performing sectors in 2009 are information technology, financials and energy returning 55.9%, 26.3%, and 21.4%, respectively. The worst-performing sectors were telecom services (-8.3%), utilities (1.4%) and consumer discretionary (2.4%).

Small cap stocks outperformed large cap stocks — returning 27.5% for the year to date versus 18.3% during the first six months of this year — and growth stocks outperformed value stocks, according to the S&P/Citigroup BMI total return growth and value indices, which returned 21.9% and 16.6%, respectively for the first half of this year.

Canadian mid-term bonds gained 4.2%, as measured by the DEX Universe Bond index, followed by long-term bonds (2.6%), and short-term bonds (2.4%). Real return bonds, as measured by the RRB Overall Index, had a comparatively high performance of 6.1% over the same period. For the quarter that ended on June 30, 2009, the DEX Universe Bond Index returned 1.3%.

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