Flat Returns For Canadian DB Pension Plans In Q3 Amidst Equity Market Losses - Aggressive Central Bank Interventions And Uncertain Economic Outlook Cited As Headwinds

Canadian DB pensions in the RBC Investor & Treasury Services All Plan Universe gained 0.5% in Q3, bringing the year-to-date return to -13.7% for the period ending September 30, 2022.

Niki Zaphiratos, Managing Director, Asset Owners, RBC Investor & Treasury Services, said, “Pensions experienced a temporary reprieve in July as the global markets rallied sharply. This rather short-lived change in market sentiment was based mostly on the assumption that the central banks’ actions would help control inflationary pressures. We then saw losses over the rest of the quarter, primarily due to concerns that additional aggressive measures would be taken by the central banks.”

“As we head toward year-end,” Zaphiratos continued, “we are facing various headwinds: the emergence of new COVID-19 variants, the fear of upcoming central bank interest rate hikes and quantitative tightening to combat high and persistent global inflation, and the implications of the Russo-Ukrainian War and US-China tensions. Economic uncertainty remains high and pension fund managers are preparing for ongoing market volatility as the weight of these pressures continues to be felt.”

DB pension plans’ foreign equities returned -1.1%, slightly behind the MSCI World Index, which returned -0.1%. Growth stocks significantly outperformed value stocks in July, but ended the quarter only slightly ahead (MSCI World Growth CAD +1.1% versus MSCI World Value CAD -1.2%). Within the MSCI World benchmark, weakness in the Communications (-7.3%) and Real Estate (-6.0%) sectors were offset by strength in the Consumer Discretionary (+6.8%) and Energy (+5.0%) sectors. Pension plans with unhedged US dollar exposure benefitted from the rapid appreciation of the US dollar versus the other major trading currencies, driven by investors flocking to that safe haven option.

Canadian equities held by Canadian DB plans returned -1.2% over the quarter, slightly ahead of the TSX composite’s -1.4% return over that period. In the benchmark, weakness was noted in the Communication Services (-7.5%) and Energy (-5.3%) sectors, whereas the Industrials (+4.2%) and Consumer Discretionary (+4.2%) sectors outperformed. On a year-to-date basis, Canadian equities led their global counterparts owing to their large exposure to the Energy sector, and were the top performing asset class (-8.8%) in the peer universe.

Fixed income securities held by Canadian DB plans returned 1.1% for the quarter, but were down 17.5% on a year-to-date basis. The FTSE Canada Universe bond index meanwhile returned 0.5% in Q3, compared to -5.7% in Q2. As central banks around the world continued to aggressively raise short-term interest rates to stem inflation, long-term bonds (FTSE Canada Long Term Bond Index +1.5%) outperformed their short-term counterparts (FTSE Canada Short Term Bond Index -0.3%) for the quarter. However, the reverse was true on a year-to-date basis, with short-term bonds returning -4.7% and long-term bonds returning -21.0%.

Historic performance