The financial health of Canadian pension plans continued to strengthen in the first half of 2007, adding to the improvement made in 2006. The Mercer Pension Health Index is now back to levels not seen since the fall of 2004.

“The improvement is due to an increase in long-term interest rates that have lowered the cost of pensions” said Paul Forestell, retirement professional leader at Mercer Human Resource Consulting, in a news release. Long-term rates have risen by about half a percent since the end of 2006. The Pension Health Index increased from 84% at the start of the year to 89% at the end of June 2007. “The funded ratios of many plans would have improved by a greater margin than suggested by the Index because it does not take into account contributions many sponsors would have been making over the past few years,” added Forestell.

“On the asset side of the pension plan balance sheet, it was the Canadian equity component that helped drive the improvement in the Mercer Pension Health Index.” said Peter Muldowney, business leader for Mercer Investment Consulting in Canada. “While equity markets worldwide have been strong over the past six months, most Canadian investors do not hedge the currency, so the recent strength of the Canadian dollar offset foreign equity market gains.”

A typical balanced portfolio of investments would have returned 0.3% for the second quarter of 2007 and 1.8% for the six months ended June 30. This return does not capture any impact from active management of any of the assets.

Canadian equities was by far the best performing asset class during the first half of 2007, with the S&P/TSX composite index returning an impressive 9.1%.

During this period, the best performing sectors were telecommunications, industrials and information technology returning 26.7%, 19.4% and 16% respectively, according to the S&P/TSX sector indices. The worst performing sectors were health care (-1.7%), utilities (+0.1%) and financials (+3.4%).

Small cap stocks, returned 12.8% (BMO Nesbitt Burns index), outperforming large cap stocks (S&P/TSX 60) which returned 8.8%.

Growth stocks slightly outperformed value stocks as shown by the S&P/Citigroup BMI total return growth and value indices, which returned 9% and 8.9% respectively.

For the quarter to June 30, the S&P/TSX composite index returned 6.3%.

International and U.S. equities boasted strong positive returns in local currency terms during the first six months of the year, with the MSCI EAFE Standard index returning 9.8% and the S&P 500 returning 7%. In Canadian dollar terms, the MSCI EAFE returned 1.4% and the S&P 500 returned -2.4% due to the strength of the Canadian dollar.

For the quarter to June 30, the MSCI EAFE Standard index returned -1.6% and the S&P 500 returned -2% in Canadian dollar terms.

In bonds, the Scotia Capital Universe Bond index returned -0.8% over the 6 months to June 30th 2007. This index comprises short-term, mid-term and long-term bonds. Returns from the short term bond component, which returned 0.6%, were offset by the negative returns posted by the long-term bond and mid-term bond indices, which returned ‑2.6% and ‑0.9% respectively. For the quarter to 30th June 2007, the returns for the SC Universe, short-term, mid-term and long-term bond indices were -1.7%, -0.4%, -2%, -3.2%, respectively.

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