Canadian DB Pensions End 2018 in the Red

Tumbling equity markets in Q4 negated a strong first half.

Despite a promising first half of 2018, falling equity markets during the fourth quarter sent Canadian defined benefit plans into the red for the year, according to RBC and Northern Trust.

According to the RBC Investor & Treasury Services All Plan Universe, Canadian defined benefit plans fell 3.5% during the fourth quarter, compared to a 0.1% gain the previous quarter, to end the year down 0.7%, compared to a gain of 9.7% in 2017. Data from the Northern Trust Canada Universe also showed a loss of 3.5% for defined benefit plans during the fourth quarter, however, it reported a 0.1% loss for the third quarter, and a 1.0% loss for the year.

“Geopolitical and economic uncertainty reverberated through the market all year,” Ryan Silva of RBC Investor & Treasury Services, said in a release. “Trade wars, rate hikes, oil prices, and Brexit helped contribute to lower earnings expectations which drove returns sharply lower in Q4 and for the year.”

Canadian equities and the TSX Composite Index had a rough fourth quarter, shedding 10.6% and 10.1%, respectively, as each ended the year down 8.9%. This was a sharp reversal from 2017 when Canadian equities rose 9.0%, and the TSX Composite Index climbed 9.1%. Higher interest rates and lower oil prices contributed to the disappointing returns as eight of the 11 sectors on the TSX were negative for the year.

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The decline in the price of oil and other commodities, combined with the expectation of a more moderate growth environment, attributed to much of the weakness of the markets in the fourth quarter. The healthcare and energy sectors were hit the hardest during the quarter, according to Northern Trust, while information technology was the strongest-performing sector for the year.

“Equity markets wrapped up 2018 on a sour note amid slowing global growth, inflation fears, rising interest rates, US-China trade war concerns, an unsettled Brexit, and struggles in emerging markets,” said Arti Sharma, CEO of Northern Trust Canada. “Volatility once again resurfaced in the wake of these stresses and allowed uncertainty to dominate markets in the fourth quarter.”

Despite ending the year in negative territory, the Canadian defined benefit plans outperformed Canadian diversified pooled fund managers, which posted a median loss of 5.6% before management fees in the last quarter of 2018, and a loss of 2.7% for the year, according to human resources services company Morneau Shepell.

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