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Pension investments helped reduce impact of lower bond rates, Mercer says

TORONTO – Consulting firm Mercer says Canadian defined benefit pension funds had to contend with a drop in long-term bond yields during the first quarter, but the negative impact was mostly offset by stronger investment performance.

The firm’s Canadian pension health index fell to 94 per cent on March 31, from 95 per cent at the beginning of the year.

The index uses a model portfolio as a representative of the overall pension universe.

Mercer says several factors reduced the impact of lower interest rates, including strong returns on some overseas equity markets, which were magnified by a lower value for the Canadian dollar compared with other currencies.

It says a typical balanced pension portfolio returned 6.2 per cent in the first quarter of 2015.

Long-term interest rates are used to calculate how much a defined benefit pension plan is required to hold to make the future payments promised to pensioners. The lower the rates, the more a plan needs to hold.

Mercer says long-term Government of Canada bond yields ended the first quarter at 1.9 per cent, down from 2.3 per cent at the beginning of the year.

During the quarter, the Bank of Canada cut its key rate a quarter point to 0.75 per cent — a move that the central bank said was designed to provide a cushion for the economy as it dealt with a drop in oil prices.

“Falling oil and food prices allowed many central banks to hold back on interest rate rises, which ultimately led to strong global equity performance in the first quarter this year,” said Mathieu Tanguay, partner in Mercer’s Investments business.

He said that equity markets in the Europe-Africa-Far East region reached double digit performance, as a whole, as did equities in most of its constituent regions.

Tanguay added that U.S. stocks posted returns of around one per cent in U.S.-dollar terms “while Canadian equity market returns were only modestly higher. A harsh winter is said to be partly to blame for this underwhelming performance.”

On Tuesday, Aon Hewitt said that its survey of 449 plans showed a median solvency funded ratio of 89 per cent, down two percentage points from the end of 2014 and six points lower than a year ago.