Pension plans continue to feel the pressures of declining financial markets according to Mercer Investment Consulting’s third quarter 2002 survey of pooled fund performance.

During the quarter, equity markets around the world faced significant losses. Canadian equities were among the better performers, losing 13.1%, compared with U.S. equities, which lost 13.7% and international equities with losses of 16.2%.

In a quarter where every major developed equity market declined and Canadian interest rates fell, Canadian bonds posted a solid return of 4.2%.

“Fixed income holdings which normally receive little more than a cursory glance are now getting the attention they deserve,” said Irshaad Ahmad, head of Mercer Investment Consulting’s Toronto office, in a news release. “In particular, those plan sponsors who chose to set up their fixed income portfolios to move in line with their liabilities are definitely doing better than those who did not.”

During the third quarter of 2002, the median Canadian equity manager outperformed the S&P/TSX Composite index by 50 basis points with a median return of -12.6% compared to the S&P/TSX Composite index return of -13.1%. For the 12 months ending Sept. 30, 2002, the S&P/TSX Composite index returned -8.1%, while the median pooled fund manager’s performance was -5%.

The average active manager modestly outperformed versus their benchmarks in Canadian and U.S. equities, but under performed in other asset classes.

“The results in this quarter reinforce the benefits of active management during turbulent economic times. Patience and skill in manager selection continue to be at a premium. Plan sponsors who held on to their value managers during the market boom in 1999 and 2000 have been rewarded,” said Ahmad.

The survey covers pooled funds available to Canadian institutional investors. These funds are managed on a fully discretionary basis by over 85 investment managers.

The impact of the negative returns in the equity market and declining interest rates is visible in the Mercer Pension Health Index as it decreased to 83% at the end of September 2002. The Index was at 103% at the end of the first quarter of 2002.

“The 20% decline in the Index indicates a difficult environment for Canadian pension plans, one where the financial position of a typical pension plan has experienced a precipitous decline in the last six months,” added Ahmad.

Introduced in the first quarter of 2002, the Mercer Pension Health Index monitors the directional impact of the capital markets on the net financial position of Canadian pension plans, by considering both the assets and the liabilities. The Index represents the ratio of assets to liabilities for a model pension plan – the higher the ratio, the healthier the plan.