By Tom Bradley

Mercer, the pension and benefits consultant, reported this week that the funding status of Canadian pension plans improved dramatically in 2009. Its ‘pension health index’ moved up from 59 to 74, meaning that for a typical plan, 74% of the pension liabilities are funded at this point. Despite the improvement, however, the number is still negative (i.e. below 100%) and more than half of Canada’s pension plans remain underfunded.

This good news / bad news scenario is likely reflective of individual investors who don’t have a company or government plan and are managing their own pension assets. They are behind where they want to be, but the recovery in 2009 helped a lot.

From my experience on both sides of the business, I would expect the range of outcomes is wider for individual investors. Pension funds make mistakes, sometimes big ones, but their institutional nature generally keeps them close to their long-term asset mix. That means they went down a lot in 2008, but got a good chunk of it back in 2009.

Individuals have more flexibility. They can move quickly and have no by-laws telling them they must hold at least X% of their assets in equities at all times. If you believed what you heard at Christmas parties a year ago, there were a lot of people who got out of the market and avoided much of the carnage in 2008. If these investors got back into the market in some fashion, they will have indeed done better than all but a few pension plans. On the other hand, there were disasters too – investors who got out near the low and didn’t get back in. Through our work with clients, we have seen both situations.

Pension plans have some advantages over private investors (Size a Liability in Nimble Field of Stocks and Bonds) including low fees, expert advisors and access to alternative investments. But with a good plan and steady constitution, individuals can use their own edge - access to small managers and illiquid securities, less benchmark focus and customized asset mix - to generate superior returns.

Unfortunately, the solution to an underfunded plan of any type is not just better investment results. The surest path to better pension health is saving more.