Weak pension fund performance leads to plan losses in 2007

'Poor equity performance in the fourth quarter took its toll on plans’ funded status'

Toronto (15 January 2008) – Canadian pension plans ended 2007 no better funded than at the start of the year, unless plan sponsors made additional contributions to top them up, according to the Mercer Pension Health Index (MPHI) which was released yesterday.

“Poor equity performance in the fourth quarter took its toll on plans’ funded status,” said Peter Muldowney, business leader for Mercer’s investment consulting business in Canada. “A significant contributing factor on investment returns over the year was the impact of the strengthening of the Canadian dollar on foreign equity returns.”

Long-term interest rates also fell back to beginning of year levels, which together with disappointing equity returns, led to the MPHI giving back all of the improvements seen in the first half of the year. In July, the Index had briefly attained levels not seen since the fall of 2004. Decreases in the second half of the year resulted in a net loss for the year of 2%.

“In each of the past two years, long-term interest rates rose for the first half of the year and then fell back in the second half,” said Paul Forestell, Retirement Professional Leader at Mercer. “This means that long-term rates remain low, keeping the value of defined-benefit pension promises expensive.”

A typical balanced portfolio of investments would have returned 1.7% for the 2007 calendar year and 0.0% for the fourth quarter of 2007. This return does not capture any impact from active management of any of the assets.

Canadian equities were the best performing asset class for 2007, with the S&P/TSX Composite index returning 9.8%.

  • The best performing sectors in 2007 were Information Technology, Materials and Telecommunication Services returning 48.2%, 30.3% and 19.9% respectively, according to the S&P/TSX sector indices. The worst performing sectors were Health Care (-24.2%), Consumer Staples (-5.3%) and Financials (-1.6%).
  • Small cap stocks returned 2.0% (BMO Small Cap Blended Weighted Index), underperforming large cap stocks (S&P/TSX 60) which returned 11.1% during 2007.
  • Growth stocks outperformed value stocks as shown by the S&P/Citigroup BMI total return growth and value indices, which returned 13.6% and 5.3% respectively for the 2007 calendar year.

For the fourth quarter of 2007, the S&P/TSX Composite index returned -1.2%.

In bonds, the DEX Universe Bond index returned 3.7% in 2007. This index comprises short-term, mid-term and long-term bonds, which returned 4.1%, 3.3%, and 3.4% respectively. For the fourth quarter of 2007, the returns for the DEX Universe, short-term, mid-term and long-term bond indices were 2.7%, 1.6%, 2.4%, 4.8%, respectively.

In Canadian dollar terms, international and US equities returned -5.3% and -10.5% respectively during 2007, as represented by the MSCI EAFE and the S&P 500 indices. The impact of the strong Canadian dollar is highlighted by the local currency returns for the MSCI EAFE and the S&P 500 at 4.0% and 5.5% respectively, for the year.

For the fourth quarter of 2007 the MSCI EAFE returned -2.4% and the S&P 500 returned -4.0% in Canadian dollar terms.


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