Strong Q4 Returns Propel Canadian DB Pensions to 9.1% Return in 2023

Thanks to the fourth-quarter 2023 rally, Canadian private and public sector defined benefit pension plans made back nearly all their losses from 2022, according to RBC Investor Services.

RBC’s analysis, based on data from various private and public sector client pension plans, found that the plans’ median return in 2023 was 9.1%, thanks in large part to an 8.2% median return during the fourth quarter. The plans rebounded from a 4.0% loss in the third quarter and a 10.3% loss for all of 2022.

“This quarter represents the third-best performance in over two decades, with notable quarters in Q2 2020 and Q2 2009,” Marijana Jovanovic, RBC Investor Services’ head of product development, said in a release. “Positive returns in both fixed income and equity markets during Q4 were driven by investor optimism over potential near-term interest rate cuts amid decreasing inflationary pressures.”

The plans’ global equities investments returned 7.9% during the fourth quarter and 16.3% for the year; however, this fell short of the MSCI World Index’s 8.7% return for the quarter and 20.5% return for the year.

Information technology was the top-performing sector for the plans, returning 14.6% during the quarter and 49.2% for the year, followed by investments in the communication services sector, which earned a 41.7% annual return. Real estate investments also performed well for the plans, returning 14.3% during the final quarter, while growth stocks easily beat value stocks, as the MSCI World Growth index returned 33.3% over the year compared with 8.5% for the MSCI World Value index.

Canadian equities returned 7.5% during the fourth quarter and 10.9% for the year, just below the TSX Composite Index, which gained 8.1% during the quarter and 11.8% for the year. RBC attributed the divergence in performance between global and Canadian equities to the Canadian market’s lower exposure to the “in-favor” growth-style stocks.

The plans’ Canadian fixed-income assets rallied during the fourth quarter, rising 10.9% to end the year up 7.8% thanks to declining yields and tightening credit spreads. This topped the FTSE Canada Universe Bond Index, which returned 8.3% and 6.7% during the quarter and the year, respectively. Interest rate-sensitive long-term bonds were among the top assets within the class, returning 14.8% during the quarter and 9.5% for the year. Meanwhile, short-term bonds returned 4.1% for the quarter and 5.0% for the year.

“Potential future inflation arising from the Red Sea crisis introduces uncertainties impacting global trade and supply chains,” Jovanovic said. “Geopolitical tensions, notably conflicts in the Middle East and Ukraine, are also under consideration as plan managers adapt their strategies to navigate this environment.”