Health of pension plans improves

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Canadian pension plans finally saw their funded position improve in the first quarter of 2012 after a year of weakness caused by slumping stock markets and declining bond yields.

Pension consulting firm Mercer said a typical pension plan saw its funding improve by 3 per cent in the first three months of 2012 after falling 13 per cent in 2011. The gain is the first improvement in plan funding since the first quarter of last year.

Mercer's pension health index – which measures the funding status of a model pension plan with typical asset allocations – improved to 63 per cent funding by March 31 from 60 per cent at the end of 2011. That means the model plan had assets equal to 63 per cent of the estimated liability for funding its pensions.

The index doesn't necessarily reflect typical funding levels of real pension plans because it does not take into account cash infusions that companies must put into their plans to make up funding shortfalls. But the index does reflect the direction and magnitude of change in funding at pension plans caused by market conditions such as investment returns.

In the first quarter, Mercer said positive investment returns pushed funding up by two per cent, while higher bond yields added a further percentage point gain.

Long-term federal bond yields increased by 15 basis points – or 15 one-hundreds of a percentage point – in the quarter. Bond yields are critical for pension plans because they are used to measure the size of pension liabilities.

Mercer partner Scott Clausen said many plan sponsors are looking for an improvement in the health of their plans in 2012 after weak investment returns and plummeting interest rates in 2011 sent pension funding down to levels last seen during in the financial crisis in 2008.

"The improvement in the first quarter is a step in the right direction as companies continue to explore opportunities to reduce risk through various investment approaches and by managing plan design," Mr. Clausen said.

While Canada's S&P/TSX composite index climbed 4.4 per cent in the first quarter, major global markets overall were up almost 10 per cent in the period measured in Canadian dollars, Mercer said.