Canadian DB Plans Rebound in 2019, Return 14%

Strong comeback from 2018 losses provides second-highest return in 10 years.

Canadian defined benefit (DB) pension plans returned a robust 14% in 2019, which was the second-highest annual return in the past 10 years, thanks to a surge in Canadian and global equity markets, according to a report from the RBC Investor & Treasury Services All Plan Universe. The returns rebounded strongly from 2018, when Canadian defined benefit plans lost 0.7% for the year.

RBC’s third annual Canadian Defined Benefit Pension Survey found that plan sponsors are particularly concerned about the economy, including persistent low interest rates and market volatility. It said this is compounded by a rising number of aging pensioners, which the firm refers to as the “silver tsunami,” as well as a working-age population that is increasing at a much lower rate.

RBC said alternative investments remain popular among pension plans as they search for higher returns to compensate for increasing pension obligations and a low-return environment. Despite significant challenges, the funded status of these plans has continued to improve.

“Over the past 10 years, the average Canadian defined benefits plan has generated an annualized return of 8% on its assets,” said David Linds, RBC’s head of asset servicing, Canada, in a statement. “These results are quite impressive, though we can’t discount the impact of global uncertainty and trade tensions in the years ahead. While the performance of equity markets suggests that investors expect to see continued growth, plan sponsors need to continue building robust strategies to prepare for higher volatility as earnings and fundamentals begin to slow.”

According to the survey, economic factors are weighing on pension plans as 20% of respondents said that low interest rates were the most pressing challenge, while 13% said market volatility was their biggest concern, and another 13%  said aligning future liabilities with assets remains one of their biggest challenges. Economic and geopolitical uncertainty and demographic changes were cited by 7%.

In regard to de-risking strategies, the popularity of liability-driven investments has declined to 30% from 39%, while buy-out annuities (18%) surpassed shared risk plans (17%) as the second-most popular de-risking option among Canadian defined benefit plans.

RBC’s survey also found that 71% of pension plans now hold alternative investments within their portfolios, with real estate and infrastructure as the most popular at 95% and 91% respectively, which are expected to rise even further in the coming years. Additionally, 72% of respondents said they expect to increase their alternative allocations in the near term, while few said they intend to reduce their alternative allocations, which ranged from 0% for real estate to 7% for hedge funds.

Two-thirds (66%) of the plans surveyed reported that their pension plans were fully funded in 2019, up from 56% in 2018.

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