Stock market weakness takes toll on pension plans

Accompanying weakness in the Canadian dollar relative to the U.S. dollar and the euro pushed down the declines further

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.”