Canadian DB Pensions, Pooled Funds Rebound Sharply in Q2

A strong rebound by global equities in the second quarter helped Canadian defined benefit (DB) plans and pooled funds recover most of their investment losses from the early days of the COVID-19 pandemic, according to the Northern Trust Canada Universe and Morneau Shepell.

“Despite the level of volatility witnessed over the last several months, Canadian pension plans are tracking in a positive direction,” Katie Pries, CEO and president of Northern Trust Canada, said in a statement. “Although there still remains a heightened level of uncertainty in the current environment as the pandemic continues to run its course, plan sponsors continue to persevere as they navigate on a path to sustainability.”

As global financial markets rallied in the second quarter, the median plan in the Northern Trust Canada Universe, which tracks the performance of Canadian institutional investment plans that subscribe to the firm’s performance measurement services, returned 9.9% for the second quarter.

Canadian Equities, as measured by the S&P/TSX Composite, saw a robust 17% gain for the quarter, with the majority of all sectors earning strong gains, while US equities clawed their way back from recent lows as the S&P 500 rose 15.3% in Canadian dollars for the quarter. And international developed markets, as tracked by the MSCI EAFE Index, closed out the quarter with a 10.1% return in Canadian dollars, while the MSCI Emerging Markets index rose 13.1% in Canadian dollars during the quarter, with all sectors earning positive gains.

Meanwhile, Morneau Shepell reported that diversified pooled fund managers returned 11% before management fees for the second quarter, falling short of the benchmark portfolio of 55% equity and 45% fixed income by 1.2%. The funds are down 0.8% since the beginning of the year.

“The speed and magnitude of both the first-quarter sell-off and the subsequent rebound have been unprecedented,” Jean Bergeron, partner for the Morneau Shepell Asset & Risk Management consulting team, said in a statement. “However, the higher solvency liability caused by the decrease in interest rates means that pension fund financial positions fell by an average of 3% to 10% compared to the beginning of the year.”

In the second quarter of 2020, pooled managers earned returns of 6.6% on bonds, which was 0.7% higher than the benchmark index. During the quarter, short-term, mid-term, and long-term bond indices returned 2.2%, 4.8%, and 11.2%, respectively. The high-yield bond index posted a return of 7.6%, while the real return bond index provided a 6.2% return.

Morneau Shepell’s Performance Universe, which covers just over 300 funds managed by nearly 45 investment management firms, are based on returns provided by leading portfolio managers, including independent investment management firms, insurance companies, trust companies, and financial institutions. The returns are calculated before deduction of management fees.