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Canada : Funded status of Canadian pension plans remain strong at June 30, 2014

July 3, 2014

The solvency position of Canadian pension plans improved slightly in the second quarter of 2014. The Mercer Pension Health Index stands at 105% on June 30th, down from 106% at the start of the year, but up from 104% as of March 31st. From a pension perspective, the story mid way through 2014 has been a tug-of-war between long-term interest rates and equity markets. Long-term interest rates have declined, pushing pension liabilities higher. However, pension assets have grown almost as much as pension liabilities due to strong equity returns and the positive impact of falling interest rates on bond portfolios.

Many plan sponsors were expecting interest rates to continue moving upwards in 2014, and further improve the funded position of pension plans. In fact, the reverse has happened with long-term interest rates falling by more than 40 basis points during the year. Once again, it shows that pension plans remain largely exposed to significant and unpredictable volatility of interest rates.

The financial position of pension plans remains healthy and it continues to be a good opportunity for plan sponsors to measure and, if necessary, adjust their risk exposure to their desired level. For many, this means reducing their risk exposure by increasing fixed income allocations or by offloading portions of their liabilities to an insurance company through an annuity transaction said Manuel Monteiro, Partner in Mercer s Financial Strategy Group. We expect annuity market activity to ramp up significantly in the 3rd and 4th quarters of 2014.

The current positive pension situation could deteriorate quickly, particularly if equity markets falter or there is continued downward pressure on long-term interest rates. Consequently, there could be a significant early mover advantage for plan sponsors who are able to act quickly.

Despite downward revisions of their economic growth forecast for 2014 by both the Bank of Canada and the U.S. Federal Reserve, the Canadian and U.S equity markets continued their upward trends over the second quarter of 2014. Spurred by strong returns in April and June, the Canadian equity market, represented by the S&P/TSX, outperformed the U.S and international equity markets expressed in Canadian dollars, for a second quarter in a row, said Diane Alalouf, Consulting Leader in Mercer s Investments business.

On the bond side, a number of factors were responsible for falling yields since the start of the year, including core inflation staying below the Bank of Canada s target rate, weaker economic indicators later in the quarter, risk aversion during the quarter related to geopolitics, and a healthy demand for long bonds, continued Diane Alalouf.

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Source: TendersInfo (India)

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