(January 7, 2013) — Canadian pension plans’ exposure to equities helped push them to a better funding ratio despite a continued fall in rates and bond yields last year, consulting firm Aon Hewitt has found.
The median Canadian pension solvency funded ratio was around 1% higher at the end of last year, compared to 12 months earlier, taking the number to 69% by the end of December. Aon Hewitt said much of this improvement was due to the performance of equities in funds’ portfolios. Emerging markets produced a 16% return, followed by international equities, which made 15.3%. US equities returned 13.4%, while Canadian equities made 7.2%.
Canada is the fourth largest nation in terms of pension assets and at the end of 2011, the average fund had a 39% exposure to equities, according to last year’s asset allocation by consulting firm Towers Watson. The nation has the second largest defined benefit pension system after Japan – 96% of assets compared to 98% – but holds much more capital in ‘risky’ assets such as equities, the Towers Watson survey showed.
However, Canada has reduced its holding in equities over the past decade – in 2001 the average allocation was 62%. Over this decade-long period, the funds have allocated more to fixed income – upping allocations from 26% to 39% – and alternative assets such as real estate and infrastructure – a 10% allocation doubled to 20%.
These alternative assets made better returns for the funds, but due to their relatively smaller holding had a lesser impact on the funds’ solvency. Aon Hewitt found real estate made 25.8% for the funds with infrastructure producing 11.7% over the 12 month period.
In the United Kingdom, allocations to these real assets helped pension funds and investors of charity assets performed well over the last 2012 months, even if liabilities increased due to low bond yields, a review by State Street has found.
The annual WM All Funds Universe review, which tracks performance of 200 pension and 270 charity funds, found those with a significant exposure to real assets performed the best in 2012.
The industry average for pension funds was 8%, while charities made 11%, State Street said this week.