Canadian pension plans faced more losses in the second quarter of 2012, compounding years of problems from weak stock markets and low interest rates.
Two new reports released Wednesday show pension funds saw their investment portfolios weaken in 2012, continuing a long-term funding crunch facing companies sponsoring the plans.
An analysis by pension consulting firm Mercer shows the funded status, or solvency position, of pension plans declined sharply in the second quarter of 2012. Mercer’s revamped pension health index stood at 77 per cent on June 30, down five percentage points from 82 per cent on March 31.
The index, which tracks the performance of a hypothetical model pension plan with typical investments, was at 76 per cent on Dec. 31.
It means a typical pension plan saw its health improve in the first quarter this year and then saw the gains erased in the second quarter. The large funding deficits are leaving employers with significant obligations to make cash contributions to improve pension plan health.
“It was mainly in May – the big thing was that bond yields went down by 30 basis points ... and that was coupled with the stock markets being really weak in May,” said Manuel Monteiro, a partner in Mercer’s financial strategy group.
“Every other month has actually been mildly positive, but May was where all the damage was done.”
Mercer said the five percentage-point drop in the pension health index in the second quarter included a decline of two percentage points caused by weak investment returns and a decline of four percentage points caused by lower bond yields. The index got a one percentage point boost from typical employer cash contributions, leading to a net decline of five percentage points.
Also Wednesday, an analysis by pension consulting firm Towers Watson showed its pension index fell to 56.3 per cent at June 30 from 57.1 per cent as of Dec. 31, a drop of 0.8 percentage points in the six-month period.
The index also tracks the performance of a hypothetical pension plan that invests using typical asset allocations with 60 per cent invested in stock and 40 per cent in bonds.
The results mean a typical pension plan will record weaker performance for the first half of 2012, putting increasing pressure on companies to find ways to lower the risk and volatility of their pensions, said David Service, director of investment consulting at Towers Watson.
“While equity returns were good for the first three months [of 2012], they were pretty terrible in April and May,” Mr. Service said Wednesday.
Towers Watson’s index shows the direction of performance for a typical plan on an accounting basis, which uses the methodology companies must use to reflect their pension plan performance on their financial statements.
It is different from the solvency funded status of pension plans reflected in Mercer’s index. The solvency funding reflects the legal obligation facing pension plans to remain fully funded over the long term.
Mercer’s data suggest a typical pension plan in Canada was about 77 per cent funded on a solvency basis as of June 30, while Towers Watson said its internal data suggest plans were about 85 per cent funded as of June 30.