For five years, Scott Clausen has listened to pension funds predict interest rates have surely hit rock bottom. And for five years, they've been wrong.
Now Mr. Clausen, a pension specialist at consulting firm Mercer, is reluctant to predict pension funds are finally turning the corner toward stronger health, despite promising signs of climbing interest rates over the past three months.
"Every year they seem to just keep going down," he said in an interview.
Mercer reported Friday that Canadian pension funds saw their funded status drop in 2010 despite a second straight year of strong stock market returns. That's because their investment gains were offset by growing pensions costs, which are measured using bond yields.
"The story of the year is that interest rate movements and asset returns offset each other," said Mr. Clausen, who is professional leader for Mercer's retirement practice in Canada. "So excluding any special [cash]contributions, the funded status will be about the same."
The Mercer Pension Health Index showed a typical Canadian pension plan was 73 per cent funded at the end of 2010, down from 74 per cent a year earlier, but up sharply from 68 per cent at the end of September.
The index measures the ratio of a model pension plan's assets to its liabilities, assuming a typical portfolio mix of stocks and bonds.
Mr. Clausen said many companies faced requirements to contribute money to their pension plans last year to improve their funding, despite earning more on their investments.
Mercer anticipates many companies will report a weaker funded ratio for their pension plans in their year-end financial statements, despite any cash contributions made during the year, because the drop in corporate bond yields was particularly steep in 2010.
The positive news for pension plans, however, is that funding has been improving since the end of September with stronger stock markets combined with better bond yields.
Yvan Breton, who heads Mercer's investment consulting business, said the typical pension plan earned a return of almost 4 per cent in the fourth quarter alone.
"Stocks delivered another strong performance in the fourth quarter and in 2010 overall, both domestically and abroad," he said in a statement.
A typical pension fund with a balanced portfolio earned 9.2 per cent in 2010, based on a passive index investing strategy. Canadian stocks were the best-performing asset class, with a return of 17.6 per cent, while Canadian bonds earned 6.7 per cent in the year.
Gains on foreign stocks were offset by improvements in the strength of the Canadian dollar. In local currency terms, for example, international equities posted a return of 5.3 per cent, but that was reduced to 2.6 per cent in Canadian dollars, Mercer said. The U.S. S&P 500 Index was up 15.1 per cent in 2010, but just 9.1 per cent when converted to Canadian dollars.
Janet McFarland