Pension plans take a hit

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A rough ride on the stock market and lower long-term interest rates hurt Canadian defined benefit pension plans this summer.

The Mercer Pension Health Index, which represents the solvency ratio of a model plan, fell in the third quarter to 93 per cent on Sept. 24, down from 98 per cent at the end of June.

Mercer also said the median solvency ratio of the pension plans of its clients stood at 87 per cent, down from 92 per cent at the beginning of the third quarter.

"Both the key drivers of pension health — equity market returns and long-term interest rates — went in the wrong direction over the summer," said Manuel Monteiro, leader of Mercer's financial strategy group.

Mercer said the solvency position of pension plans will decline further in the fourth quarter by about one to two per cent as a result of a new mortality table being adopted by regulators as the basis for determining the value of lump sum benefits paid to pension plan members.

Mercer said that a typical balanced pension portfolio would have returned negative 2.3 per cent during the quarter up to Sept. 24.

Meanwhile, a variety of factors including lower commodity prices, uncertainty from the U.S. Federal Reserve regarding a rate increase, a rate cut by the Bank of Canada and Canada officially entering a recession pressured the interest rate yield curve lower.

Long-term interest rates are used to calculate how much a defined benefit pension plan is required to hold to make the future payments promised to pensioners. The lower the rates, the more a plan needs to hold.