Canadian DB pension plans see lowest quarterly returns since 2008

Latest data ties for most muted on record amid harsh geopolitical climate, interest rate increases, and other issues

Canadian DB pension plans see lowest quarterly returns since 2008

Canadian pension plans experienced negative returns in all public market asset classes during the past quarter, based on new data from the RBC I&TS All Plan Universe.

Defined benefit (DB) pension plan assets declined by 8.6% during the second quarter of 2022, bringing year-to-date total returns to -14.7%. These declines were largely due to concerns about the state of the world economy, stock market declines, and rising bond yields.

Pension plan assets also decreased by 8.6% in Q3 2008, breaking the previous record for the lowest quarterly return RBC had ever reported since it started keeping track of Canadian DB plan performance and asset allocation in 1994.

"Uncertainty in the global economic landscape – particularly surrounding the war in Ukraine, substantial inflation, higher interest rates imposed by the central banks across the globe and a new strain of Covid-19 – contributed to this outcome," said Niki Zaphiratos, Managing Director, Asset Owners, RBC Investor & Treasury Services.

"The uptick of long-term bond yields, however, actually improved plans' solvency ratios," continued Zaphiratos. "While this is good news for plan sponsors, investors need to remain cautious, given economists' warnings around the prospects for more interest rate hikes over the second half of the year and the resultant negative impact on the global economy."

For Canadian plans, global equities lost 12.2% in the second quarter and 18.5 % so far this year.

In comparison, the MSCI World Index returned a somewhat lower -13.4% over the quarter, with major deterioration in the consumer discretionary (-21.3%), information technology (-19.2%), and communication services sectors (-16.8%).

Global growth and value stocks showed significantly divergent performance during the quarter, with a spread of around 10%.

The MSCI World Growth index plunged by 18.6% in the second quarter (-27.3 percent YTD), while the MSCI World Value index fell by a more manageable 8.7%. (-10.3 percent YTD).

Canadian stocks stayed up with those across the world and once more outperformed the benchmark, falling 11.3% for the quarter (-8.1% YTD). Over the quarter, the TSX Composite Index declined by 13.2%. (-9.9% YTD).

While the Canadian equity market has gained from its outsized exposure to high-flying energy stocks, Zaphiratos said they lost ground over the quarter as concerns over higher interest rates and an economic slowdown dragged down the financial and material sectors.

Plans had a quarterly return of -9.8% in the Canadian fixed income asset class, contributing to a year-to-date loss of 19.0%

Yields across the curve rose quickly as the central banks continued to abandon their ultra-accommodative stances.

The benchmark FTSE Long Bond index returned -11.8% (-22.1% YTD), while the short-term bonds section returned -1.5% (-4.4% YTD). The long-term bonds segment experiencing the greatest fall within the FTSE Canada Universe Bond Index.

Compared to their government counterparts, corporate bonds performed better.