Canada’s robust dollar wreaked havoc on pension funds in the third quarter, according to a survey just released by RBC Dexia Investor Services.

Within the $340 billion RBC Dexia universe, Canadian pensions lost 0.7% in the quarter ended September 30, 2007, trimming year-to-date results to just 1.8%.

Currency losses continued to eclipse global equity returns. Year-to-date, the MSCI world index climbed 8% in local currency terms, but this translates into a –4.1% drop in value when converted into Canadian dollars.

“Particularly with the loonie’s steep rise against the U.S. dollar — up 17% this year alone — foreign exchange exposure has jumped back into the spotlight,” says Don McDougall, director advisory services, RBC Dexia Investor Services. “Given that foreign stocks constitute about half the equity allocation of a typical pension fund, Canadian plan sponsors are sharpening their focus on currency management.”

Canadian equities returned only 0.6% to pension funds in the latest quarter, trailing the S&P TSX composite index by 1.4%. “Domestic stocks rallied in the month of September, driven mainly by materials and technology,” explains McDougall. “Unfortunately, most pension funds were underexposed to these key sectors.”

Despite the developing credit freeze, bonds were the top-performing asset class in the quarter. Canadian pensions earned a modest 1.7%, matching the Scotia Capital universe bond index.