Canada Pensions Facing Weak 2015: Survey

A survey of investment managers conducted by Mercer reveals that Canadian pension funds could be looking at a weak 2015.

From the Globe and Mail:

Canadian pension plans are facing another weak year in 2015 with interest rates forecast to remain low and Canadian economic growth expected to trail global gross domestic product expansion.

A survey of investment managers by consulting firm Mercer shows most are expecting modest increases in interest rates this year and low investment returns, combining to create slow growth in pension plan funding in 2015.

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Mercer said its Pension Health Index, which tracks the solvency position of a hypothetical pension plan with typical asset allocations, fell from a surplus position of 106 per cent at the end of 2013 to a shortfall position of 95 per cent by the end of 2014.

Mercer partner Mathieu Tanguay said most pension plans saw their funded status drop in 2014 because long-term interest rates fell, undermining investment returns for the year. Pension plans determine the size of their long-term funding liability using long-term interest rate levels, so falling interest rates mean a greater cost to fund pensions for plan members.

“Last year wasn’t too bad from an asset-return perspective only,” Mr. Tanguay said. “If you look at financial markets, a typical investor would have earned in the area of 10 to 12 per cent. So it’s not bad. But what hurt pension plans was the fact that interest rates dropped. Assets went up, but liabilities went up higher.”

The weakening was especially acute in the final quarter of 2014 as long-term interest rates fell toward 60-year lows. Long-term government of Canada bonds closed the year at 2.3 per cent, a drop from 3.2 per cent at the start of 2014.

Mercer’s Mathieu Tangua said the survey results paint a picture that pension funds are unlikely to see a funding improvement in 2015.

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