Ms. Niki Zaphiratos reports

CANADIAN DB PENSION PLANS RETURN -10.3% IN 2022

Canadian defined benefit (DB) pension plans posted hard-hitting losses in 2022 despite a positive final quarter, according to the latest survey from Royal Bank of Canada's RBC Investor & Treasury Services (I&TS).

Within the I&TS All Plan universe, pension assets returned 3.8 per cent over the past three months of the year, bringing the annual median return to negative 10.3 per cent, the lowest observed since the 2008 financial crisis, which saw an annual median return of negative 15.9 per cent.

"Pensions gained traction toward the end of 2022 despite the ongoing volatility caused by embedded inflation and subsequent higher interest rates imposed by central banks," said Niki Zaphiratos, managing director, asset owners, for RBC Investor & Treasury Services. "However, this was not enough to offset the first two quarters of heavy losses."

Foreign equities, the top-performing asset class in Q4, returned 9.7 per cent in the quarter, bringing full-year results to negative 11.3 per cent -- ahead of the MSCI World Index, which returned negative 12.2 per cent. Over the quarter, a majority of developed markets generated healthy local currency returns. In addition, currency gains outside of the U.S. market further boosted returns for unhedged portfolios (MSCI EAFE Index CAD 15.7 per cent versus MSCI EAFE Local 8.7 per cent). Value stocks outperformed growth stocks in the quarter and finished the year well ahead of their growth counterparts (MSCI World Value 0.3 per cent versus MSCI World Growth negative 24.1 per cent).

Canadian equities trailed their global counterparts over the quarter and returned 6.3 per cent, versus 5.9 per cent for the TSX Composite Index. Over the year, domestic stocks represented the top-performing asset class (returning negative 3.6 per cent in the All Plan Universe versus negative 5.8 per cent for the TSX Composite Index), attributable to a large exposure to commodity stocks.

Canadian pensions had their largest annual fixed income decline in more than 30 years, losing 16.8 per cent over the 12-month period, compared with the negative 11.7 per cent return for the FTSE Canada Bond Index. As central banks enacted restrictive monetary policy to tame surging inflation, yields rapidly rose across the spectrum. The weakness spread across the market, but inflation-sensitive, longer-duration bonds were the most affected. The FTSE Canada Long Overall Bond Index declined 21.8 per cent, while FTSE Canada Short Overall Bonds were down 4 per cent.

"It was a challenging year for pension asset managers," noted Ms. Zaphiratos. "Both equities and fixed income asset classes, which typically offset each other, experienced losses. However, the rapid rise in bond yields resulted in the lowering of pension liabilities -- and most pensions ended the quarter in a better position."

Ms. Zaphiratos continued, "In the next few months, plan sponsors will need to be attentive to risk factors such as the economic impact of the central banks' actions, ongoing geopolitical tensions and ongoing efforts to contain the COVID virus outbreak in certain emerging markets."

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