Canadian pensions struggling with solvency issues caught a break in the third quarter as stock markets rallied, according to the latest data from Mercer, a pension consulting firm.
But record low interest rates continue to pose challenges for pensions trying to fund their longterm obligations.
In a report released Thursday, Mercer said its Pension Health Index stood at 80% on September 30, up from 77% at the end of June.
Most plans are still deep under water
?It?s sort of baby steps on the way back,? said Manuel Monteiro, a partner in Mercer?s financial strategy group. However, he and other pension specialists cautioned that the performance of equity markets cannot be counted on, and Mr. Monteiro urged pensions managers to take advantage of relative good times to more closely match investments with longterm needs.
?Most plans are still deep under water,? he said, noting that many plans are only 75% to 80% funded to meet their future liabilities.
?This was a good quarter but there?s still a long way to go.?
Funding gaps are widespread. Ratings agency DBRS said in August that a review of 451 defined benefit pension plans in North America revealed a combined funding deficit of $389-billion at the end of 2011.
Keith Ambachtsheer, a pension expert and founder of KPA Advisory Services, said persistent low interest rates are the real issue because they ?materially? increase the cost of funding pensions.
?Quarterly stock markets returns represent noise, not signal,? Mr. Ambachtsheer said when asked about the trend in the third quarter.
Mercer said its Pension Health Index was boosted primarily by strong market returns. But one-third of the improvement over the second quarters came from employer deficit funding.
Canadian equities returned 7% in the third quarter, which brought the year-to-date return for 2012 to 5.4%. Foreign equity markets also generated positive returns on the quarter, but the relative strength of the Canadian dollar reduced foreign equity returns expressed in Canadian dollars.
However, unlike the experience in the second quarter, longterm government bond yields were virtually unchanged in the third quarter which meant solvency liabilities were relatively stable, Mercer said.
Many Canadian pension plan managers are planning to seek alternative investments to lessen the impact of stock markets swings and better match funding to liabilities, according to a recent survey by RBC Investor Services.
Almost half of defined benefit pension plan sponsors in the survey told RBC they intend to increase their allocation to alternative investments such as real estate and infrastructure.
The strategy has been pursued over the past few years by some of Canada?s biggest pension plan managers who have included large private equity investments in their portfolios.
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