The financial health of Canadian pension plans showed a marked decline at the end of the first quarter of 2008, to levels not seen since the middle of 2005, according to the Mercer pension health index.

“Equity returns were negative in Canadian dollar terms in almost all regions for the second quarter in a row,” says Peter Muldowney, business leader for Mercer’s investment consulting business in Canada. “This meant that asset side of the Canadian pension plan balance sheets continued to take a pounding in the first quarter of this year.”

“With liabilities increasing due to a continued decline in long-term government bond yields, the health of Canadian pension plans was squeezed on both sides,” says Paul Forestell, retirement professional leader at Mercer. “The pension health index which measures the solvency funded status of plans, reached its lowest point on March 31, 2008, falling to 77%, from 82% at the end of 2007.”

“However, due to widening credit spreads between government and corporate bond yields, funded status for pension accounting purposes has likely improved over the quarter for most pension plans,” notes Forestell.

A typical balanced portfolio of investments would have returned -1% for the first quarter of 2008. This return does not capture any impact from active management of any of the assets.

Canadian bonds was the best performing asset class in the first quarter of 2008, with the DEX universe bond index returning 3%. This index comprises short-term, mid-term and long-term bonds, which returned 3.3%, 4%, and 1.7% respectively.

The representative indices for all the other main asset classes had negative returns last quarter.

Canadian equities returned -2.8% last quarter as shown by the S&P/TSX composite index.

The best performing sectors in the first quarter of 2008 were materials and energy returning 7.3% and 1.2% respectively, according to the S&P/TSX sector indices. The worst performing sectors were consumer discretionary (-14.3%), telecommunication services (-12%) and financials (-8.6%).

Small cap stocks returned -4.7% (as measured by the BMO small cap blended weighted index), underperforming large cap stocks (as measured by the S&P/TSX 60) which returned -2.5% during the quarter.

Growth stocks outperformed value stocks as shown by the S&P/Citigroup BMI total return growth and value indices, which returned -1.6% and -5.5% respectively for the first quarter of this year.

In Canadian dollar terms, international and US equities returned -5.2% and -5.9% respectively during the first quarter, as represented by the MSCI EAFE and the S&P 500 indices. The Canadian dollar weakened against the U.S. dollar this past quarter and this had a positive impact on foreign equity performance in Canadian dollar terms. The local currency returns for the MSCI EAFE and the S&P 500 were -14.9% and -9.4% respectively, for the quarter.

The Mercer Pension Health Index shows the ratio of assets to liabilities for a model pension plan.