Stronger stock market returns helped shore up the solvency positions of most Canadian pension plans, but the improvement has been only slight, according to the Mercer Pension Health Index.

The index reading improved 2 points to 75 at the end of March, but the story could be much better, as the index does not take into account deficiency payments being made by most plan sponsors. These are required by legislation and in some cases are quite significant.

“Despite uncertainties abroad created by the turbulence in the Middle East and the catastrophic events in Japan, stocks performed well overall in the first quarter, with the biggest gains again being observed in the Canadian stock market,” said Yvan Breton, leader of Mercer’s Investment Consulting business in Canada and Latin America.

“The typical pension plan experienced a return on assets of about 2 percent in the first three months of the year, improving the Mercer Pension Health Index by about 1 percent,” Breton continued. “This return does not capture any impact from active management of any asset class.”

Canadian equity returns topped the charts, with the S&P/TSX climbing 5.6% in the first quarter of 2011. Large caps led the way, with a 5.8% return on the S&P/TSX 60, while the S&P/TSX SmallCap Index returned 4.2%.

The healthcare sector gained a staggering 51.2%, while financials brought in +9.1% and industrials and energy both returned 8.7%. The worst performing sectors were consumer discretionary (-1.8%), materials (-1.4%) and information technology (+1.0%).

Fixed income yields were on the rise in the first quarter, as bonds sold off. The DEX Universe Bond Index declined 0.3%, due to a 1.4% decline in long-term maturities. Mid-terms were almost flat (-0.2%), while short-term debt gained 0.3%. The overall yield on the DEX, started the quarter at 3.11% and ended the quarter at 3.28%.

“Long-term federal bond yields increased between 10 and 20 basis points in the first quarter, continuing the rebound started in the fourth quarter of 2010,” said Scott Clausen, retirement, risk and finance professional leader for Canada. “This increase in bond yields, offset by a slight increase in the cost of purchasing annuities, bumped the index up about 1%.”