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Fund managers forecast a good year for Canadian pension plans

Traders work on the floor of the New York Stock Exchange January 4, 2012.

REUTERS/Brendan McDermid/REUTERS/Brendan McDermid

Canadian pension plans should fare better in 2012 based on forecasts for the year by Canadian and global money managers, a new survey concludes.

Fifty leading institutional fund managers surveyed by pension consulting firm Mercer predicted growth in Canadian and global stocks will average 7 per cent in 2012, while U.S. stocks are expected to grow by 8 per cent.

The managers also predicted interest rates will rise this year and long-term bond prices will drop, averaging a return of just 0.4 per cent this year.

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"Pension plans would hope to see the managers' predictions come true," said Mercer retirement professional leader Scott Clausen.

While falling bond prices would not be good news for bonds held in a pension plan's investment portfolio, Mr. Clausen said a rise in interest rates will nonetheless help a plan immensely because its liabilities are measured based on long-term interest rates.

"If the managers' predictions come true this year, what we'll see is that the liabilities will drop by more than the assets," Mr. Clausen said in an interview. "In terms of the funded status, it's a good thing."

While pension funds saw almost flat returns on their investment portfolios in 2011, their funded status fell by almost 15 percentage points because falling interest rates sent their estimated liabilities soaring.

In its annual 'Fearless Forecast' released Monday, Mercer said money managers named the ongoing debt situation in Europe and the potential slowdown of China's economy as the two top risks for 2012 that could exert a significant drag on the global economy.

While long-term bonds are expected to return just 0.4 per cent this year, the money managers predicted better returns for the broader Canadian and global bond markets, which are expected to post returns of 2 and 3 per cent respectively.

They survey found managers expect the Canadian dollar will trade at par with the U.S. dollar at the end of 2012, while the price of crude oil will fall slightly to $95 (U.S.) a barrel from $99 at the end of 2011 and the price of gold will rise to $1,775 an ounce by the end of 2012 from $1,565 at the end of 2011.

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The forecasts are a median of the predictions submitted by money managers, who reported widely varied opinions on many of the categories. For example, forecasts for Canadian stock returns ranged from a 15-per cent increase at the top end of the group to a 0.5-per-cent gain from the bottom 5 per cent of managers surveyed.

Mr. Clausen said the forecast for interest rates and bonds showed a particularly wide range of responses this year. While the median prediction for long-term bond returns in 2012 was 0.4 per cent, the high end of the range was 8.7 per cent and the low end was a loss of 5 per cent.

"There are a lot of different opinions on where bond yields are headed," Mr. Clausen said. Some fund managers reported interest rates have hit bottom and will rise again, while others said rates will stay at current low levels and some said they will fall even further, he noted.

Gold price predictions for the end of 2012 varied from $2,000 per ounce at the top end of the range to $1,365 an ounce at the bottom. Oil price predictions ranged from $113 a barrel to $80 a barrel.

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