The financial health of Canadian pension plans stumbled in the third quarter of 2007, falling from the three-year highs seen in July, according to the latest Mercer Pension Health Index.

“Slight positive Canadian equity returns were eclipsed by negative foreign equity returns caused by a strong Canadian dollar over the last quarter,” said Peter Muldowney, business leader for Mercer’s investment consulting business in Canada, in a news release. “This meant that on the asset side of the pension plan balance sheet, Canadian pension plans were no better off than at the start of the quarter and witnessed only modest growth year to date.”

“The Mercer Pension Health Index is still up 3% for the year,” said Paul Forestell, Retirement Professional Leader at Mercer. “With long-term interest rates holding steady over the quarter at higher levels than at the end of 2006, and pension fund assets producing modest positive growth during the first nine months of the year, pension plans are better off now than they were at the beginning of the year. The picture is even better when you take into account additional contributions that plan sponsors have been making.”

A typical balanced portfolio of investments would have returned -0.1% for the third quarter of 2007 and 1.7% for the nine months ended 30th September 2007. This return does not capture any impact from active management of any of the assets.

Canadian equities was the best performing asset class during the third quarter of 2007, with the S&P/TSX Composite index returning 2.0%.

The best performing sectors were information technology, materials and utilities returning 14.4%, 12.5% and 6.9% respectively, according to the S&P/TSX sector indices. The worst performing sectors were health care (-14.7%), energy (-2.5%) and telecommunication services (-2%).

Small cap stocks returned -5.8% (BMO Nesbitt Burns index), underperforming large cap stocks (S&P/TSX 60) which returned 2.7%.

Growth stocks outperformed value stocks as shown by the S&P/Citigroup BMI total return growth and value indices, which returned 2.6% and 0.9% respectively.

In Canadian dollar terms, international and U.S. equities returned -4.5% and -4.7% respectively during the third quarter of 2007, as represented by the MSCI EAFE and the S&P 500 indices. The impact of the strong Canadian dollar is highlighted by the local currency returns for the MSCI EAFE and the S&P500 at -2.5% and 2.0% respectively, for the third quarter.

In bonds, the Scotia Capital Universe Bond index returned 1.7% over the third quarter of 2007. This index comprises short-term, mid-term and long-term bonds, which returned 1.8%, 1.9%, and 1.4% respectively.

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