In 2011, Canadian Managers See Improved Funded Positions

(January 17, 2011) — A survey by pension consultant firm Mercer has shown that Canadian pensions could see their funded status improve in 2011.

“If manager forecast of expected increase in interest rates and solid equity returns in 2011 occurs, plan sponsors should see improvement in their funded positions,” said Mark Fieldhouse, principal in Mercer’s investment consulting business in Canada, in a statement. The survey reflects the strength of the Canadian economy in 2010. “Canada was one of the first G7 nations to climb out of the recession,” said Fieldhouse at The Toronto Board of Trade, CTV News reported. Managers expect global growth to continue in 2011, albeit at a a slower pace, driven largely by emerging economies.

The Fearless Forecast survey of investment fund managers found that Canadian funds will experience reduced shortfalls and a funded status more closely resembling levels prior to 2008’s market downturn. With pension funds’ costs measured using long bond yields, the study predicted a 0.35% increase in long bond yields in 2011, which would result in a 5% decrease in the liability facing funds to provide benefits to members. Furthermore, the study estimated that Canadian equity markets will climb by 8.5% while US markets will grow by 9% and foreign markets will return approximately 7.5% in 2011. The consultant firm concluded that emerging market equity returns are expected to exceed each developed market in 2011, with a median expected return of 10%.

Mercer found that investment returns on pension funds’ asset portfolios will drive an improvement in the funded status of pension plans by about 2% in 2011.

Conducted in December 2010, the study is Mercer’s 20th annual Fearless Forecast, consisting of views of the Canadian and global markets from 56 leading Canadian and global institutional investment managers. Together, these firms manage more than $8.7 trillion (C$8.6 trillion) for Canadian pension funds and other investors globally.

Separately, according to a recent Aon Hewitt analysis, global corporate plans have averaged a funded status of 87% in 2010, only one percentage point higher than at the start of the year. The firm noted that that slight increase in funding came from equity market gains and bond price appreciations that were fueled by falling interest rates. Aon Hewitt’s findings compare with a December survey by Mercer, which concluded that pension plans sponsored were on average 81% funded at year-end 2010, down from an average funded ratio of 84% a year earlier.

“As we look to 2011 and beyond, organizations will increasingly strive for balance between funding and investment strategies in dealing with pension deficits,” Ari Jacobs, Aon Hewitt’s retirement solutions leader, said in a release. “Many employers will consider risk management programs that combine derisking plan investments with strategic funding.”