Canadian DB Pension Plans Lost Estimated 10.3% in 2022

Canadian defined benefit pension plans reported an estimated median loss of 10.3% in 2022, despite returns of 3.8% during the fourth quarter of the year, according to a survey from RBC Investor & Treasury Services. It was steepest loss recorded by RBC’s I&TS All Plan universe since the financial crisis in 2008, when the annual median loss was 15.9%.

“It was a challenging year for pension asset managers,” Niki Zaphiratos, managing director and head of asset owners for RBC Investor & Treasury Services, said in a release. “Both equities and fixed-income asset classes, which typically offset each other, experienced losses. However, the rapid rise in bond yields resulted in the lowering of pension liabilities—and most pensions ended the [fourth] quarter in a better position.”

Canadian pensions reported their largest annual fixed-income losses in more than three decades, losing 16.8% over the 12-month period, compared with an 11.7% loss for the FTSE Canada Bond Index. According to RBC, an affiliate of the Portfolio Management Association of Canada, yields rapidly rose “across the spectrum,” which it attributed to central banks enacting restrictive monetary policies in an effort to curb sharply rising inflation. Although the pain was felt across the market, inflation-sensitive, longer-duration bonds were the most affected, as the FTSE Canada Long Overall Bond Index tumbled 21.8% during the year, while the FTSE Canada Short Overall Bonds were down 4.0%.

Canadian equities returned 6.3% during the Q4 2022, beating the 5.9% gain registered by the TSX Composite Index during the period. RBC found that domestic stocks were the top-performing asset class for the year with a 3.6% loss, compared with a 5.8% annual loss for the TSX Composite Index, which RBC attributed to a large exposure to commodity stocks.

Despite being the top-performing asset class during the Q4 2022 with a 9.7% return, foreign equity investments lost 11.3% during the year. However, this still outperformed the MSCI World Index, which lost 12.2% in 2022.

A majority of developed markets saw strong local currency returns during the quarter, according to RBC, with currency gains outside of the U.S. helping to enhance returns for unhedged portfolios. Value stocks outperformed growth stocks in the final quarter and finished the year trouncing their growth counterparts as the MSCI World Value Index gained 0.3% in 2022, compared with a 24.1% annual loss for the MSCI World Growth Index.

“Pensions gained traction toward the end of 2022 despite the ongoing volatility caused by embedded inflation and subsequent higher interest rates imposed by central banks,” Zaphiratos said. “However, this was not enough to offset the first two quarters of heavy losses.”

Zaphiratos continued that, “In the next few months, plan sponsors will need to be attentive to risk factors such as the economic impact of the central banks’ actions, ongoing geopolitical tensions and ongoing efforts to contain the COVID virus outbreak in certain emerging markets.”