Canadian DB Pension Plans Generate Healthy Returns In Q1 2023 Amid Shift In Market Sentiment

Defined benefit (DB) pension plans in Canada continued to perform positively in the first quarter of 2023 according to the RBC Investor & Treasury Services All Plan Universe, a well-established and extensive source of data on Canadian DB pension plans. These plans generated a median return of 4.0%, building upon Q4 2022 returns of 3.8%.

David Giannone, Managing Director and Global Head of Business Development at RBC Investor & Treasury Services (I&TS), stated, “Despite significant market instability around the world, pension plans managed to produce positive returns. The banking sector's turmoil has raised concerns about potential negative economic consequences, prompting central banks to re-evaluate their need for aggressive measures against inflation. This has resulted in growth-oriented stocks experiencing a significant boost, with MSCI World Growth gaining 15.0% compared to MSCI World Value's modest 0.8% increase. Additionally, bond prices have rallied as a result of this shift.”

Foreign equities within the peer universe boasted the most substantial gains of all the asset classes, delivering returns of 6.9% during Q1 of 2023. Meanwhile, the MSCI World Index returned 7.6%, with the strongest performances coming from the information technology (+21.0%), communication services (+17.9%) and consumer discretionary (+16.3%) sectors. The MSCI Emerging Markets Index, on the other hand, trailed the developed markets benchmark and returned 3.8% over the same period.

The Canadian equities asset class also generated positive returns during the quarter, with a 4.2% uptick. Similarly, the TSX Composite Index rose by 4.6% over the quarter, with the information technology (+26.5%) and consumer staples (+7.9%) sectors performing particularly well. However, the gains in these sectors were slightly offset by the underperformance of the energy (-2.3%) and financials (+1.7%) sectors, which have a significant weight in the index.

During Q1 2023, the Canadian fixed income asset class produced a return of 3.7%, driven by declining government bond yields, representing a significant increase from the 0.1% return generated in Q4 2022. The FTSE Canada Universe Bond Index was also in positive territory, with a return of 3.2% in the first quarter of 2023, compared to 0.1% in the previous quarter. The FTSE Canada Long Term Bond Index (+4.7%) outperformed the FTSE Canada Short Term Bond Index (+1.8%). Furthermore, government bonds outpaced corporate bonds in this period.

Giannone continued, “It is important for asset managers to be watchful of the continuing volatility in the markets for the remainder of the year. They should also ensure that their portfolios are diversified to effectively manage their risk exposure.”

Historic performance