Equities offset weak bonds for Canada’s DB pension plans

Pension plans posted positive returns in the first half of 2021

Equities offset weak bonds for Canada’s DB pension plans
Steve Randall

Canada’s defined benefit (DB) pension plans successfully offset the weak bonds market with strong returns from equities in the first half of 2021.

The RBC Investor & Treasury Services All Plan Universe shows that Canadian DB pension plans returned 4.4% in the second quarter of the year and were up 3.5% over the first six months, continuing their strong performance since the shockwaves at the start of the pandemic.

"Canadian pension plans have generated an impressive 22.6% cumulative return on their assets since the violent sell-off in Q1 2020. This reflects the market's optimism over the sooner-than-expected reopening of the global economy due to the increased availability and uptake of vaccines in the developed world," said David Linds, managing director and head of asset servicing, Canada, RBC Investor & Treasury Services.

The positive performance in the second quarter was driven by pension plans’ large exposure to cyclical stocks, with Canadian equities delivering returns of almost 8% outperforming their global counterparts. Year-over-year returns were more than 13%.

The best returns came from stocks in the IT (23%), energy (14%), and financial services sectors (8%).

Foreign equities were also positive, returning more than 5% in the second quarter and more than 9% across the first half of 2021.

Fixed income

Fixed income returns did manage positive returns for Canadian pension plans – at 3% in the second quarter – but this was down 5% year-to-date.

Read more: BNY Mellon report: Canadian pension plans maintain positive trajectory in Q2 2023 performance

The FTSE Canada Universe Bond Index posted a quarterly return of 1.7%, with longer-term bonds (FTSE Canada Long index +3.7%) outperforming their short-term counterparts (FTSE Canada Short Term index +0.1%).

The pandemic remains a threat to performance, especially with the growth of the Delta variant.

"Managing and preparing for this possibility and remaining vigilant to other risks, such as high valuations in equity markets, mounting structural versus transitory inflationary pressures and ongoing geopolitical tensions will remain a priority of Canadian DB plans for the remainder of 2021,” added Linds.