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Mercer Canada 2010 Second 2nd quarter update

Contact: Nancy Altilia
Tel: 416 868 2364

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Canadian pension plans falter in second quarter


Canada
Toronto, 6 July 2010

 

Jittery stock markets and drops in federal bond yields hurt the financial health of Canadian pension plans in the second quarter of 2010. The Mercer Pension Health Index* stands at 67 percent on June 30, down seven percent over the quarter.

 

“Long-term federal bond yields dropped 40 basis points, ending the quarter at their lowest level since the ‘flight to quality’ of December 2008,” said Scott Clausen, retirement, risk and finance professional leader for Canada. “This resulted in higher pension liabilities measured on a solvency basis, decreasing the Index by about five percent.”

 

“Poor stock market performance is responsible for the remainder of the decline, with Canadian, US and international equity indices losing between five and ten percent over the quarter,” said Yvan Breton, Leader of Mercer’s investment consulting business in Canada. “Pension plans that do not hedge foreign currency exposure benefitted from a weakening Canadian dollar, as US and international equity returns were even worse in local currency.”

 

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A typical balanced portfolio would have returned -1.4 percent for the first half of 2010, and -2.7 percent for the quarter. This return does not capture any impact from active management of any of the assets.

 

Bonds performed better than equities in the first half of the year as well as in the second quarter. Canadian bond performance, as measured by the DEX Universe Bond index, returned 4.2 percent in the first 6 months of 2010, led by long term bonds which gained 7.8 percent, followed by mid term bonds (5.0%) and short bonds (2.2%). For the quarter, the DEX Universe Bond Index returned 2.9 percent. During the first 6 months of the year, overall bond yields (measured by the DEX Universe Bond index yields), fell from 3.32 percent at the beginning of the year to a low of 3.02 percent in February, and then rebounded to a high of 3.62 percent in April before settling back to 3.08 percent at the end of the second quarter.

 

 

S&P/TSX returned -2.5 percent for the last 6 months and -5.5 percent in the last quarter.

 

  • The best performing sectors in the first half of the year were Health Care (+22.8%), Telecom Services (+9.8%) and Consumer Discretionary (+7.9%) according to the S&P/TSX sector indices. The worst performing sectors were Information Technology (-20.5%), Consumer Staples (-8.9%) and Energy (-6.8%).

 

  • Small cap stocks returned 1.3 percent (BMO Small Cap Blended Weighted Index), outperforming large cap stocks (S&P/TSX 60 index) which returned -3.3 percent during the first 6 months of the year. For the second quarter, both the BMO Small Cap Blended Weighted Index and the S&P/TSX 60 returned -5.7 percent

 

  • Value stocks outperformed growth stocks as shown by the S&P Canada BMI total return value and growth indices, which returned -0.2 percent and -5.3 percent respectively for the first half of the year. For the quarter the value index and the growth index both returned -5.8 percent.

 

 

 

The Canadian dollar had a mixed impact on foreign equities during the first half of 2010.

 

  • International equities, as measured by the MSCI EAFE (CAD) index, provided a return of -11.7 percent in the first half of the year and -9.7 percent in the second quarter. In local currency terms the MSCI EAFE returned -7.0 percent and -10.9 percent over the same periods.

 

  • In the US, the S&P500 (CAD) returned -5.4 percent and -7.2 percent in the first half of the year and in the second quarter respectively. In US dollar terms, the S&P500 returned -6.7 percent and -11.4 percent during the same periods.

 

  • Emerging markets, as measured by the MSCI Emerging Markets (CAD) index, returned -4.8 percent in the first 6 months of 2010 and -3.9 percent in the second quarter.

 

 

* The Mercer Pension Health Index shows the ratio of assets to liabilities for a model pension plan. The ratio has been arbitrarily set to 100 percent at the beginning of the period. The Index assumes contributions equal to current service cost and no plan improvements. Assets: Passive portfolio with asset mix shown below. Liabilities: 50 percent active members, 50 percent retired members; Canadian Institute of Actuaries transfer values (April 2009 standard after April 1, 2009) without the two-month lag for active members and annuity purchase proxy values for retired members. Results will vary by pension plan.

 

Asset mix: 42.5% DEX Universe Bond Total Return Index; 25% S&P/TSX Composite; 15% S&P 500 (CAD); 15% MSCI EAFE (CAD); 2.5% DEX 91 day T-Bills

About Mercer

Mercer is a leading global provider of consulting, outsourcing and investment services. Mercer works with clients to solve their most complex benefit and human capital issues, designing and helping manage health, retirement and other benefits. It is a leader in benefit outsourcing. Mercer’s investment services include investment consulting and multi-manager investment management. Mercer’s 18,000 employees are based in more than 40 countries. The company is a wholly owned subsidiary of Marsh & McLennan Companies, Inc., which lists its stock (ticker symbol: MMC) on the New York, Chicago and London stock exchanges. For more information, visit www.mercer.ca

 

 

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