The financial health of pension plans in Canada remained stable in the first quarter of 2010 as diversified investment portfolios produced modest overall returns, Mercer reported on Tuesday.

The Mercer Pension Health Index, which shows the ratio of assets to liabilities for a model pension plan, ended the first quarter at 74% — unchanged from the beginning of the year.

“Small changes in the estimated cost to purchase annuities offset the modest investment gains earned in the quarter resulting in no change in the index,” said Scott Clausen, retirement, risk and finance professional leader for Canada. “On the other hand, corporate AA bond yields dropped around a quarter to half a percent, resulting in an increase in the liabilities companies report on their balance sheets.”

A typical balanced portfolio would have returned 1.3% last quarter. This return does not capture any impact from active management of any of the assets.

The best performing asset class was Canadian equities, with the S&P/TSX composite index returning 3.1% in the last quarter.

Sector-wise, the top performers were health care (+10.3%), financials (+8.1%), consumer discretionary and industrials (both returning +6.2%), according to the S&P/TSX sector indices. The worst performing sectors were energy (-2%), consumer staples (+0.2%) and materials (+0.3%).

Small cap stocks returned 4.9% in the first quarter, according to the S&P/TSX Small Cap index, while large cap stocks in the S&P/TSX 60 index returned 2.6%.

Value stocks significantly outperformed growth stocks as shown by the S&P Canada BMI total return value and growth indices, which returned 6% and 0.6%, respectively.

Canadian bond performance, as measured by the DEX Universe Bond index, returned 1.3% during the quarter. Long-term bonds led the asset class, gaining 2.6%, followed by mid-term bonds at 1.7% and short bonds at 0.4%.

Overall bond yields, measured by the DEX Universe Bond index, picked up in March, ending the quarter at 3.37% versus 3.32% at the beginning of the year.

The strengthening of Canadian dollar versus most other major currencies had an overall negative impact on foreign equities during the first quarter of 2010.

“The continued strengthening of the Canadian dollar again prevented pension plans without currency hedging strategies from realizing higher returns earned by foreign equity investments,” said Yvan Breton, leader of Mercer’s investment consulting business in Canada.

International equities, as measured by the MSCI EAFE (CAD) index, provided a return of -2.3% in the last quarter. In local currency terms the MSCI EAFE returned 4.4% over the same period.

In Canadian dollar terms, the Japanese markets led with a 4.8% return followed by the Asia Pacific (ex-Japan) markets with a return of -0.2%. The European markets posted a -4.9% return.

In the U.S., the S&P 500 returned 2% in Canadian dollar terms in the last quarter, with value stocks outperforming growth stocks. In U.S. dollar terms, the S&P 500 returned 5.4%.

Emerging markets, as measured by the MSCI Emerging Markets index, returned -0.9% in Canadian dollar terms in the last quarter.

IE