The financial health of Canadian pension plans was unsteady in the first quarter, primarily due to continued volatility in stock markets, according to data released Friday by Mercer.

After all was said and done, the Mercer Pension Health Index had increased to 62%, up 3% from the beginning of the year.

“Most markets continued to drop in the first quarter of 2009, albeit to a lesser extent than in the fall of last year,” says Yvan Breton, business leader of Mercer’s investment consulting business in Canada.

“Overall, first quarter losses on pension plan assets dropped the index by about 2%. These losses were more than offset by gains on the other side of the balance sheet,” adds Breton.

“The rules for determining lump sum values of pension entitlements were changed effective April 1, 2009 and the cost of purchasing annuities from insurers has declined.” says Paul Forestell, orofessional leader for Mercer’s retirement, risk and finance business. “These two changes combined with a slight increase in government bond yields increased the index by about 5%.”

A typical balanced portfolio would have returned -3% last quarter. This return does not capture the impact from active management of any of the assets.

Canadian bond performance, as measured by the DEX Universe Bond index, returned 1.5% last quarter, led by mid-term bonds which gained 2.6%, followed by short term bonds (1.7%), and long bonds (0.3%). Real return bonds as measured by the RRB Overall Index had a comparatively high performance of 4.7% over the quarter.

Most other major equity asset classes (excluding emerging markets) had negative returns in the first quarter of 2009.

Canadian equity performance, as measured by the S&P/TSX composite index, was the best performing equity asset class in Canadian dollar terms, posting a return of -2% last quarter.

Within the index, the three best performing GICS sectors were Information Technology (8.8%), Materials (7.8%), and Health Care (4.3%). The 3 poorest performing GICS sectors were Utilities (-11.9%), Industrials (-10.2%) and Consumer Discretionary (-7.5%).

Canadian small cap stocks outperformed large caps as shown by the BMO Small Cap Blended (weighted) index which returned 1.3% and the S&P/TSX 60 index dropping by 1.5% during the first quarter of 2009.

Canadian growth stocks outperformed value stocks as shown by the S&P Canada BMI indices which returned 2.9% and -5.0% respectively in 2008.

The further weakening of the Canadian dollar against the U.S. dollar in the first quarter this year had a positive impact on the U.S. equity index returns (in Canadian dollar terms). In the U.S., the S&P 500 dropped by 9.3% (in Canadian dollar terms) in the first quarter of 2009, with growth stocks outperforming value stocks (Russell 3000 Growth, -2.7% and Russell 3000 Value, -15.4%). In U.S. dollar terms, the S&P 500 returned -11.0%.

In Canadian dollar terms, international equities, as measured by the MSCI EAFE index, provided a return of -12.2% in the first quarter. In local currency terms the MSCI EAFE returned -10% over the same period: the strengthening of the Canadian dollar versus the major currencies (namely the Euro and the Yen) had a negative impact on the Canadian dollar return of the MSCI EAFE index. The Pacific ex Japan equity markets led with a -0.3% return while Japan significantly underperformed with a return of -15%.

After a disastrous 2008, emerging markets slightly picked up the pace with a return of 3% (in Canadian dollar terms) last quarter.

IE