Hot foreign markets boost Canadian pension plans

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Hot stock markets – especially foreign markets – propelled Canadian pension plans to stronger returns in early 2012, but the gains are not sufficient yet to erase the large financing deficits facing many pension funds.

Pension plans earned returns of 4.5 per cent in the first quarter this year, adding to a 4.2-per-cent increase posted in the fourth quarter of 2011, according to a new survey of Canadian plans by RBC Dexia Investor Services.

The first-quarter gain was the largest reported by pension funds since the third quarter of 2010, RBC Dexia said.

The biggest factor in the gain was improved stock market performance, including a 9.9-per-cent median return from foreign equity holdings in the first quarter; and a 5.6-per-cent gain on Canadian equity holdings, RBC Dexia said.

Bonds were "underperformers" in the first quarter, the company said, with pension funds reporting their fixed-income holdings fell by 0.2 per cent.

Scott MacDonald, who heads the pensions division at RBC Dexia, said plans have been struggling for several years with large financing shortfalls, so two quarters of positive returns will not be enough to erase the losses.

"This has been good news for a couple of quarters now, and it will have helped, but it won't single-handedly erase the solvency deficit of all of the pension plans in Canada," Mr. MacDonald said in an interview. "So more help is needed."

Pension plans have faced growing financing deficits since 2009 due to weaker investment returns and declining bond yields. Pension funds on average lost money in the first three quarters of 2011, posting a gain of only 0.5 per cent in the year as a whole – thanks entirely to gains in the fourth quarter.

Even the past two quarters of gains have not been a story of steady increases. While stock markets climbed in January and February, Canadian markets slid in March and are down further so far this month, suggesting there may not be a lasting rally to turn the corner on pension-plan health.

Canadian pension plans have slowly been increasing the proportion of equities they are holding because of their funding deficits, Mr. MacDonald said. Stocks historically have had higher returns than assets such as bonds, and pension funds are seeking to bolster their returns.

In the first quarter this year, pension plans boosted foreign equity holdings to 31.1 per cent of their assets, up from 29.3 per cent at the end of 2011. Canadian equity allocations were slightly lower, falling to 25.8 per cent from 26.2 per cent at the end of the year.

"They're just continuously under pressure because of poor solvency levels and they need to seek those returns," Mr. MacDonald said. "They're inching up on their [equity]allocations during good times … but it still won't be enough to rescue the solvency situation single-handedly."

Investment managers were willing to take on more risk in the first quarter amid hopes – at least earlier in the year – there would be more economic stability in Europe and stronger U.S. economic performance, RBC Dexia said.

The study is based on a sample of 45 Canadian defined benefit pension plans drawn from RBC Dexia's broader database of 127 pension funds with assets totalling $420-billion.