Pension funds take hit in third quarter

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Canadian pension funds saw their funding problems grow dramatically in the third quarter as bond yields tumbled while stock markets went into decline.

Pension consulting firm Mercer said its pension health index slipped to 60 per cent funding at the end of September from 71 per cent at the end of June and 75 per cent at the end of March. The index measures the change in funded status of a typical pension plan with average asset allocations.

The pension health index is hovering near its low point of 59 per cent funding, recorded at the end of 2008 following steep market declines.

The results suggest many pension funds are facing growing deficit problems, with their assets increasingly failing to cover their estimated liabilities for providing pensions to members. Funds typically don't have to calculate or record their funded status until the end of their fiscal year, however, so the funding problems have not yet been crystallized by most pension plans.

Scott Clausen, Mercer's professional leader for Canada for retirement, risk and finance, said the findings suggest pension fund sponsors should be carefully watching their financial status.

"The volatility in the financial markets illustrates the importance of monitoring the funded status of individual pension plans on a regular basis as the funded status can vary widely from one plan to another and from one quarter to another," he said.

The funding problems are showing up on both sides of pension funds' balance sheets. Long-term federal bond yields, which are used to measure the size of a pension plan's funding obligation, dropped about 80 basis points in the third quarter, while investment returns also slumped, reducing the value of assets to meet the obligation.

Mr. Clausen said the decrease in bond yields contributed to about 8 percentage points of the drop in the pension health index in the third quarter, while declining investment returns accounted for the other 3 percentage point decline.

Canadian stocks fell by 12 per cent in the quarter, and five out of 10 main Toronto Stock Exchange sectors posted double-digit declines. Global markets also fell, but that decline was mitigated for pension funds by the weakening of the Canadian dollar.

Mercer's analysis says a typical pension fund lost 3.9 per cent on its investments in the third quarter.