(July 31, 2012) – As with pensions globally, defined benefit (DB) funding in Canada is suffering from weak equity markets and Eurozone instability, according to a survey by RBC Investor Services.
It’s a familiar story. Returns dropped into the red for the April-through-June quarter, with C$410 billion ($409 billion) in pension plans losing 1.1%. In the first quarter, plans gained 4.5%.
“After the sustained rally in the previous two quarters, pension plans felt the heat of the ongoing saga in Europe and the resulting domino effect on Canadian and foreign equities,” said RBC’s Head of Pensions, Insurance, and Sovereign Wealth Strategy Scott MacDonald, in a statement. “The weakening of the Canadian dollar lessened the impact of falling foreign equities on Canadian DB plans, but the continuing downward pressure on stock prices is eroding the gains of plans seeking higher returns from equities.”
Canadian equities was the worst performing asset class, with the S&P/TSX Composite index falling 5.7% for the quarter. Still, Canadian pensions’ domestic equity holdings outperformed the sliding market by half a percent. RBC attributed this to most portfolios being light on energy and materials, two sectors that had a particularly rough quarter.
Even with interest rates extremely low, CIOs who sought out a safe haven in fixed-income did not regret it. Long-term bonds compensated somewhat for the sorry stock market, rising 4% and performing best of any asset class. MacDonald doesn’t foresee bonds’ popularity waning. “Continued worries surrounding Europe and the slowdown in the Chinese and US economies had investors seeking safety in government bonds once again,” he said.