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Pension plan returns jump on higher long-term rates, stronger markets

A new study says Canadian pension plan returns jumped in the first quarter, driven by stronger equity markets and higher long-term interest rates.

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Canadian pension plans posted sharply improved results in the first quarter of 2013 due to higher long-term interest rates and strong equity markets.

Pension consulting firm Mercer said Tuesday a typical pension plan saw its funded position improve by 5 percentage points in the first quarter this year. Mercer's pension health index, which measures the funded status of a typical pension plan, improved to 87 per cent from 82 per cent at the end of 2012.

"All the key drivers of pension plan health moved in the right direction in the first quarter of 2013," said Mercer partner Manuel Monteiro. "Equity markets performed very well, long-term interest rates edged up and plan sponsors have been making contributions to fund the deficits."

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A typical pension portfolio earned 4.1-per-cent returns in the first quarter of 2013, primarily due to gains in global equities and in U.S. markets in particular. Canadian equities earned 3.3 per cent in the first quarter.

A similar survey of pension plan results by consulting firm Aon Hewitt also showed a 5-percentage-point improvement in funding for pension plans in the first quarter. Aon Hewitt said the discount rate -- the long-term interest rate used to calculate the size of a pension plan's liabilities -- climbed to 3.04 per cent at the end of March from 2.96 per cent, which has helped to improve pension plans' funded status.

Aon Hewitt said pension plans in its sample data base had an average funding shortfall of 74 per cent at the end of March, an improvement from 69 per cent on Dec. 31.

Despite the improvement, Aon Hewitt said 97 per cent of Canadian pension plans still have a funding shortfall.

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