The average Canadian defined benefit pension plan returned negative four per cent in the third quarter of 2023, according to two new reports.
The RBC Investor and Treasury Services’ universe, which tracks performance and asset allocation across Canadian DB plans, found the most recent quarterly losses mean the average return has decreased to 1.9 per cent since the beginning of the year.
In a press release, Niki Zaphiratos, managing director of asset owners at RBC Investor & Treasury Services, said higher bond yields meant DB plan liabilities reduced during the period despite negative returns. “The market’s response to geopolitical developments emphasizes the importance of vigilant monitoring and strategic decision-making for asset owners.”
Fixed income assets declined by 6.6 per cent, due to a move by investors to drive up government bond yields in anticipation of prolonged elevated short-term rates, while both domestic and foreign equities also saw losses during the period.
Foreign equities declined by 1.7 per cent, slightly behind the negative 1.4 per cent return of the MSCI World index. Interest rate-sensitive utilities (negative 7.3 per cent) and real estate (negative 5.1 per cent) represented the worst performers from the foreign equities asset class. However, energy provided a substantial return of 13.7 per cent as costs continue to increase in the sector.
Domestic equities returned negative 2.2 per cent — the same return as the S&P/TSX composite index. Similarly to foreign equities, the energy sector provided a positive return, at 10.3 per cent.
A separate report by Northern Trust Corp. found the median Canadian DB plan returned negative 3.7 per cent for the third quarter.
The losses were softened by healthier returns in previous quarters, it noted. The period was marked by a negative tone carried across global financial markets from ongoing uncertainty surrounding monetary policy due to the mixed effects of inflation like escalating oil prices rising bond yields and a robust labour market.
In a press release, Katie Pries, president and chief executive officer of Northern Trust Canada, said DB plan sponsors have been tasked with maintaining discipline in a challenging environment. “This past quarter demonstrated how rapidly volatility can resurface, creating unfavourable market conditions and increasing pressure on investment portfolios.”