Canadian Pension Plans Still Reeling

John Morrissy of the Financial Post reports in the Montreal Gazette, Pension plans fail to reap recent stock gains:

Canadian pension plans hardly benefited from the third quarter's solid stock gains, as falling bond yields weighed on returns, global services firm Mercer said Thursday.

Mercer's Pension Health Index stood at 68 per cent in September, up only one point during the quarter, the report said.

The index is a ratio of assets to liabilities. The most recent figures show that 68 per cent of liabilities — or projected payouts to pensioners — are covered by current assets — largely stocks and bonds.

The last time payouts were fully covered by assets was in early 2002. The number has fallen steadily since, dipping as low at 60 per cent at the height of the financial crisis in 2008, and leading to public concern about the health of individual pension plans.

"For the second straight quarter, long-term federal bond yields declined significantly, dropping 30 basis points during the quarter," said Mercer executive Paul Forestell.

"This resulted in higher pension liabilities measured on a solvency basis, decreasing the Index by about five per cent."

During the most recent quarter, Canadian equities returned 10.3 per cent while bonds, as measured by the DEX Bond Universe index, returned 3.2 per cent. Bond yields, conversely, fell from 3.08 per cent at the beginning of the quarter to 2.8 per cent at the end.

The Canadian dollar, which rose about 3.5 per cent against the U.S. dollar during the quarter, had a mixed impact on Canadian pension plans, boosting returns in international equities but diminishing returns in U.S. stocks, Mercer said.

This isn't just a Canadian problem. Serious deficits exist across all global pension plans. Lower bond yields and lackluster equity markets are a lethal cocktail for pension plans' funded status. It could take years before they shore up their funded status. This is yet another reason why central banks are trying so hard to reflate risk assets to generate higher inflation expectations.

Will they succeed? The jury is still out on that one, but let me leave you with an excellent interview with Jim Bianco. Click here and listen carefully to Jim's comments. I think Friday's jobs figures will come in better than expected and the USD will rally. We'll see how markets react, but one thing is for sure, bubbles abound. Be very careful fighting the market here -- keep buying the dips.

***Update: US labor market remains weak***

It's frustrating watching this play out month after month, but the labor market remains weak. The US lost more jobs than forecast in September, reflecting a decline in government payrolls that shows the damage being done by rising budget deficits. Even here in Canada, the economy unexpectedly lost 6600 jobs in September, Statistics Canada said Friday, as the country's recovery faltered after an initially strong rebound from recession. Get ready for more QE, and some major bubbles.