While equity markets posted lacklustre returns in the second quarter of 2015, the funded status of Canadian pension plans improved thanks to rising long-term interest rates.
According to Mercer Canada’s Pension Health Index, which measures the health of Canadian defined benefit plans, a 50 basis point increase in long-term Government of Canada bond yields to 2.4% in the second quarter of 2015 pushed down plan liabilities by 5% to 8%. The Index, which calculates the ratio of assets to liabilities for a model pension plan, now stands at 100%.
Mercer notes that the best performing sectors in the S&P/TSX were health care, telecom services, and consumer discretionary, which were up by 12%, 3%, and 3% respectively. The worst sectors were industrials, utilities, and information technology, which lost 8%, 5%, and 4% respectively. Overall, Canadian equities only posted a 0.6% return for the quarter.
"Pension plans remain exposed to significant risk, particularly the possibility of an equity market downturn or another drop in interest rates," comments Manuel Monteiro, leader of Mercer’s Financial Strategy Group. "With funded positions being relatively healthy, it is an opportune time for plan sponsors to adjust their pension risk exposure to their desired level. For many, this means reducing their risk exposure by increasing fixed income allocations or by offloading portions of their liabilities to an insurance company through an annuity transaction."