A booming Canadian stock market helped Canadian pension plans eke out a modest improvement in their financial position in the third quarter of 2005, the Mercer Pension Health Index shows.

The index was 81% at the end of September 2005, up from 79% at the end of June this year down from 84% at the end of December 2004.

“The good news is the 12% return on Canadian stocks in the third quarter alone”, said Paul Purcell, the Global Professional Leader for Mercer Human Resource Consulting, in a written commentary.

“The bad news is that there remains a big hole for most plans to climb out of, and it will almost certainly take higher long-term interest rates for that to happen.”

“Organizations with pension plans should budget for higher costs in 2006. But at least the increases are unlikely to be as dramatic as they were a few years ago”, Purcell said.

“Some pension plans will look quite a bit different than the index. Pension plans that have hedged their sensitivity to interest rates will have fared much better. On the other hand, those that have promised inflation-indexed pensions have likely fared worse, with the continued decline in real return bond yields”, Purcell noted.

The overall state of Canadian pension funds was improved by the strong performance of Canadian equities last quarter. According to the results of Mercer Investment Consulting’s Pooled Fund Survey, Canadian balanced fund managers did fairly well last quarter, with a median return of 4.1%.

Canadian equities were the strongest performing asset class in the third quarter this year, as shown by the S&P/TSX Composite index which returned 11.6% during this period. All major styles and market caps had strong positive returns.

The best performing sectors were Energy, Utilities and Telecommunications, returning 25.7%, 16.7% and 10.9% respectively over the last quarter, according to the S&P/TSX sector indices.

The poorest performing sectors were Consumer Staples, Information Technology and Consumer Discretionary.

International equities was the next best performing asset class, with the MSCI EAFE returning 4.6% over the last quarter (in Canadian dollar terms). The strengthening Canadian dollar had a very clear impact on the Canadian dollar performance of this index, when compared to its local currency return of 11.5%.

Canadian bonds remained level over the third quarter, as shown by the Scotia Capital Universe index which returned 0.1% during this period.

U.S. equities was the weakest performing asset class of the quarter, as represented by the S&P 500 index that returned -1.8% (in Canadian dollar terms). The strong Canadian dollar had an impact on this return, when compared to the U.S. dollar return of 3.6%. The median U.S. equity return for this period equalled that of the index.