See why Canadian DB pension plans returned -4.0 percent in Q3, and which sector brought relief
The third quarter posed significant challenges for Canadian defined benefit (DB) pension plans within the RBC Investor Services All Plan Universe, amidst intricate market dynamics. These plans reported a loss of 4.0 percent in the third quarter, bringing down the year-to-date return to 1.9 percent for the period ending September 30, 2023.
The market fluctuations unfolded against a global economic backdrop marked by inflationary pressures, driven in part by higher energy costs, as well as geopolitical tensions, including the Russia-Ukraine conflict and escalating trade disputes.
Fixed income assets held by Canadian DB plans experienced a decline of 6.6 percent over the quarter due to investors driving up government bond yields in anticipation of prolonged elevated short-term rates. The FTSE Canada Universe Bond Index decreased by 3.9 percent, with longer-dated bonds (FTSE Canada Long Term Bond Index -9.5 percent) underperforming their shorter-dated counterparts (FTSE Canada Short Term Bond Index -3.9 percent).
Concerns about the impact of sustained high interest rates on global economic growth led to modest losses in equity markets. DB pension plans' foreign equities experienced a minor decrease of 1.7 percent, slightly behind the MSCI World Index, which returned -1.4 percent. Within the benchmark, eight out of 11 sectors recorded negative returns, with the interest rate-sensitive utilities (-7.3 percent) and real estate (-5.1 percent) sectors being the worst performers. The energy sector, however, demonstrated notable strength, delivering a substantial return of 13.7 percent. Unhedged Canadian DB pension plans benefited from the weakness of the Canadian dollar against the US dollar during the quarter.
Equities face modest losses
Canadian equities held by Canadian DB plans also faced modest losses, returning -2.2 percent for the quarter, aligning directly with the S&P/TSX Composite Index. Similar to the other developed market equity benchmarks, weakness in the Canadian benchmark was widespread (nine out of 11 sectors recorded negative returns), with relief coming from the energy sector (+10.3 percent).
"It's worth noting that despite the negative returns experienced by most plans in Q3, their overall financial health improved due to higher yields reducing the present value of their liabilities," says Niki Zaphiratos, managing director and client partner, RBCIS. "The market's response to geopolitical developments emphasizes the importance of vigilant monitoring and strategic decision-making for asset owners."
About the RBC Investor Services All Plan Universe
RBC Investor Services has published one of the industry's largest and most comprehensive universes of Canadian pension plans for more than 40 years. The All Plan Universe, a widely-recognized quarterly benchmark, tracks the performance and asset allocation of a cross-section of assets across Canadian defined benefit pension plans, helping institutional investors monitor investment decisions, optimize performance and mitigate risks.
