Canadian defined benefit pensions see solid returns

Exposure to equities helped pension plans overcome macro concerns, but more challenges lie ahead

Canadian defined benefit pensions see solid returns

With global equity markets continuing to show strength, Canada’s defined benefit pension plans managed to close out 2021 with an 8.9% annual return, only slightly down from 9.2% in 2020.

According to RBC Investor & Treasury Services, the country’s pension plans posted a median return of 4.5% in Q4 last year.

"Despite increased volatility over concerns about the Omicron variant and mounting inflationary pressures, Canadian pension plan returns were significantly boosted by their exposure to equities,” said Niki Zaphiratos Managing Director, Asset Owners, Client Coverage, Canada, RBC Investor & Treasury Services.

Canadian stocks outperformed their worldwide rivals in the fourth quarter, yielding 6.5% and finishing the year with a 27% annual return.

The TSX Composite Index returned 6.5% during Q4, bringing the year’s total return to 25.1%. Except for healthcare, every economic sector in the benchmark generated positive returns; energy and financials led in annual performance with 48.9% and 36.5%, respectively.

In Q4 2021, foreign equities experienced a 5.3% gain, which resulted in an annual return of 17.1%. Due to the strength of the Canadian dollar, local currency returns for unhedged pension plan took a hit. The financials and information technology sectors led the MSCI World Index to a 7.5% return in Q4 2021 and a 20.8% annual return. Among foreign equities, U.S. stocks led their counterparts by a wide margin.

Emerging market equities, as reflected by the MSCI Emerging Markets index’s 3.37% dip, lost ground in 2021. That was mostly due to steep declines in Chinese markets as the MSCI China benchmark sustained an annual loss of 22.4%.

Fixed income assets in Canada gained 2.7% in the fourth quarter of 2021, but were down -1.9% for the year. The FTSE Canada Universe Bond index, on the other hand, returned 1.5% for the quarter and -2.5% for the year.

Despite the overall positive picture painted by the results, Zaphiratos stressed that DB pension plans have a rocky path ahead of them.

"New Covid-19 variants, the Russia-Ukraine crisis and imminent interest rate hikes – stemming from global shortages of workers and resulting inflationary pressures – introduce the potential for further volatility,” she said. “Plan sponsors will have considerable risk factors to navigate in 2022."