The solvency position of Canadian pension plans improved sharply in the first quarter of 2013 due to strong equity market performance as well as an uptick in long-term interest rates, global consulting firm Mercer said Tuesday.

The Mercer Pension Health Index, which shows the ratio of assets to liabilities for a model pension plan, stands at 87% on March 31, up from 82% at the start of the year.

“All the key drivers of pension plan health moved in the right direction in the first quarter of 2013. Equity markets performed very well, long-term interest rates edged up, and plan sponsors have been making contributions to fund the deficits,” said Manuel Monteiro, partner in Mercer’s financial strategy group.

“A typical balanced pension portfolio returned 4.1% (not annualized) in the first quarter,” noted Rob Stapleford, partner in Mercer’s investment consulting business. “Developed, global equities returned about 10% while emerging markets were essentially flat on the quarter. These returns benefitted many plans which have diversified their equity holdings in recent years by increasing fund allocations to global equities while reducing their exposure to the concentrated Canadian stock market.”

Canadian equities returned 3.3% in the first quarter.

For the quarter, the best performing S&P/TSX sectors were Health Care (22.8%), Information Technology (17.5%) and Industrials (14.2%). The worst performing sectors were Materials (-10.4%), Utilities (0.5%), Financials and Energy (both 4.2%).

Large cap stocks (S&P/TSX 60 Index) returned 3.3%, outperforming small cap stocks (S&P/TSX SmallCap index) which returned 0.6% during the quarter.

Value stocks outperformed growth stocks as measured by the S&P Canada BMI Value and Growth indices, which returned 3.9% and 2.1% respectively in the first quarter.

In Canadian dollar terms, the S&P 500 Index returned 12.9% for the quarter. International equities, as measured by the MSCI EAFE (CAD) index, generated a return of 7.4% for the quarter. Emerging markets, as measured by the MSCI Emerging Markets (CAD) index, returned 0.4%. During the quarter, the Canadian dollar strengthened against the British Pound, Euro and Japanese Yen but weakened against the USD which had a mixed impact on foreign equity returns expressed in Canadian dollars.

At the end of the quarter, the yield on the DEX Universe Index was 2.23% while the yield on the DEX Long Term Bond Index was 3.34%. The DEX Universe Bond Index returned 0.7% in the first quarter, while the DEX Long Bond Index returned -0.3%.

While the stock markets generated returns in excess of those required to fund liabilities, Canadian pension plans continue to show growing interest in alternative asset classes such as real estate (mostly domestic strategies) and infrastructure (mostly foreign strategies) where returns are less volatile than equities and more consistent with the pattern of liability returns.