Last year was a good one for Canadian pension funds, according to Mercer Investment Consulting’s Pooled Fund Survey.

The Canadian pooled balanced pension fund median return was 13% for 2006, benefiting from strong performance in most of the major equity markets in. The median return for Canadian pooled balanced pension funds was 7.3% for the fourth quarter of 2006.

“The financial situation of Canadian pension funds was propped up from two sides last year. Not only was pension fund performance very strong, aided by good Canadian and very strong international equity market returns, but pension fund liabilities generally declined or grew by only a small margin due to due to higher long term yields,” said Peter Muldowney, business leader for Mercer Investment Consulting in Canada, in a news release. “This meant that most pension plans would have seen the gap between pension fund assets and liabilities reduced at the end of 2006 compared to the end of 2005.”

The improvement in Canadian pension funds’ financial situation is illustrated in Mercer’s Canadian Pension Health index, which showed a solvency rate of 87% at the end of December 2006 — an increase from the December 2005 solvency rate of 80% and the September 2006 solvency rate of 82%.

While 2006 saw great absolute equity returns, it was a difficult year for active managers. The median return of investment managers lagged the indices in all of the major equity asset classes for the year and quarter to Dec. 31, 2006.

International equities closed the year as the strongest performing major asset class of 2006, with the MSCI EAFE returning 26.4% (in Canadian dollars) for 2006. The strongest performing region was Europe, with the MSCI Europe returning 33.8% (in Canadian dollars) in 2006. The median annual return of 26.3% for international equity managers trailed the MSCI EAFE index’s total returns (in Canadian dollars) by 0.1%. For the fourth quarter, the median return of 15.1% in international equities underperformed the MSCI EAFE index by 0.1%.

The next best performing asset class (in Canadian dollar terms) was Canadian equities, which returned 17.3% for the year as shown by the S&P/TSX composite index. The median return from Canadian equity managers was 17.2%, which was slightly behind the index. Canadian equity managers posted a median return of 10.2% for the fourth quarter of 2006, underperforming the S&P/TSX by 0.2%.

Large cap securities outpaced small caps: the S&P/TSX 60 index delivered 19.2% while the BMO Nesbitt Burns Small Cap (weighted) index delivered 16.6% for the year. For the fourth quarter the S&P/TSX 60 and the BMO Nesbitt Burns indices returned 10.9% and 9% respectively.

Growth stocks returned 14.6%, outperforming their value counterparts returned 19.3% for 2006. The reverse was true for the last quarter of 2006 where growth stocks returned 13.4%, outperforming value stocks which returned 7.7%.

Over the past year, the best performing sectors were Materials (39.8%), Information Technology (27.3%), and Telecom Services (20.1%) per the S&P/TSX sector indices. The worst performing sectors were Health Care (0.7%), Consumer Staples (5.5%), and Energy (6.1%). Last quarter the best performing sectors were Materials (20.8%), Information Technology (19.1%), and Health Care (15.4%). The worst performing sectors were Energy (7.7%), Consumer Staples (7.4%), and Telecom Services (-1.1%).

The S&P 500 index’s total returns (in Canadian dollars) was 15.4% for the year, which was well ahead of the U.S. equity median return of 14.2%. The median return in the fourth quarter was 10.9%, trailing the S&P 500, which returned 11.3% in Canadian dollar terms. In U.S. dollar terms, the S&P500 Index returned 15.8% and 6.7% for the year and fourth quarter, respectively.

In bonds, active managers generally outperformed the index. For 2006, the Scotia Capital Universe registered 4.1%, while the median bond return was 4.3%. For the fourth quarter, bond median return was 0.8%, slightly ahead of the Scotia Capital Universe which returned 0.7% during the same period.