Continued strength in portfolio returns helped buoy pension plans in the third quarter as the cost of purchasing annuities climbed, according to the latest Mercer Pension Health Index.

While government bond yields were stable over the quarter, the assumed credit premium over the yields decreased, sending solvency liabilities higher.

The Mercer Pension Health Index increased to 72%, up 1% from the beginning of the third quarter and up 13% since the start of the year.

“The Canadian equity market uptrend continued in the third quarter accompanied by strong returns in both the U.S. and International equity markets,” says Yvan Breton, leader of Mercer’s investment consulting business in Canada. “Overall, third quarter gains on pension plan assets bumped up the index by about 4%.”

“The increase in the cost of purchasing annuities decreased the index about 3%,” says Paul Forestell, professional leader for Mercer’s retirement, risk and finance business. “As well, with the fiscal year end approaching, corporate AA bond yields continued to slide from the beginning of the year, also increasing pension liabilities that companies report on their financial statements.”

A typical balanced portfolio would have returned 6.4% for the third quarter of 2009, Mercer says. This return does not capture the impact from active management of any of the assets.

All major asset classes posted positive returns during the third quarter of 2009.

The best performing asset class was Canadian equities with the S&P/TSX returning 10.6% for the last quarter. The best performing sectors for the quarter were health care, financials and materials returning 22.2%, 16.1% and 12.4% respectively, according to the S&P/TSX sector indices. The worst performing sectors were Information technology (-8.1%), consumer staples (-2.7%) and utilities (3.6%).

Small cap stocks returned 21.1% for the quarter (BMO Small Cap Blended Weighted Index), outperforming large cap stocks (S&P/TSX 60) which returned 8.8% during the third quarter.

Value stocks outperformed growth stocks as shown by the S&P Canada BMI total return value and growth indices, which returned 12.5% and 9.6% respectively.

Canadian bond performance, as measured by the DEX Universe Bond index, returned 2.7% in the last quarter, led by long-term bonds which gained 4.3%, followed by mid-term bonds (3.5%), and short-term bonds (1.6%). Real return bonds as measured by the RRB Overall Index had a return of 3.3% over the same period.

The Canadian dollar continued its strength in the third quarter versus most other major currencies had an overall negative impact on foreign equity indices for the quarter. International and U.S. equities returned 10.5% and 6.8% respectively during the third quarter of 2009, as represented by the MSCI EAFE (CAD) and the S&P 500 (CAD) indices. The local currency returns for the MSCI EAFE and the S&P500 were 14.9% and 15.6% respectively, during the third quarter.

Emerging markets continued to show its strength returning 11.9% (in Canadian dollar terms) in the third quarter.

IE