The financial position of Canadian pension plans declined in the third quarter (Q3) as a result of weakness in equities markets, according to a new report from global consulting firm Mercer.
The Mercer Pension Health Index, which aims to track the ratio of assets to liabilities for a hypothetical pension plan, dropped to 93% on Sept. 24 from 98% at June 30. In addition, Mercer reports that the median solvency ratio of its clients’ pension plans dipped to 87% from 92% at the beginning of Q3.
A typical balanced pension portfolio would have declined by 2.3% during Q3, Mercer notes. This weakness came as some of the world’s major equities markets suffered declines during the quarter. For example, U.S. equities markets dropped by 5.9% (in U.S. dollar terms [US$]) during the quarter; and Europe, Australasia and Far East (EAFE) markets saw a 10% drop (in local currency terms), Mercer reports.
For Canadian investors, weakness in the Canadian dollar (C$) relative to both the US$ and the euro cushioned these declines. In C$ terms, U.S. equities managed a 0.7% gain in Q3 and EAFE markets dropped a more modest 4.4%, Mercer reports.
Conversely, Canadian equities, which don’t enjoy a currency cushion, dropped by 7.7% during the quarter. Furthermore, Mercer reports that emerging-markets equities dropped by 12.8% (in C$ terms) during the quarter.
“The Canadian yield curve remained mostly at the same level this summer,” notes Diane Alalouf, leader of Mercer’s Investments business for Eastern Canada, in a statement. “A variety of factors including lower prices of commodities and oil, uncertainty from the [U.S.] Fed[eral Reseve Board] regarding a[n interest] rate increase, another surprise rate cut from the Bank of Canada, moving to 0.5% from 0.75%, and Canada officially entering a technical recession pressured the curve downward. However, that was balanced by an increase in credit spreads.”