The second year of the coronavirus pandemic offered defined benefit pension plan sponsors a reprieve from the chaos sown in financial markets during its first year.
“A lot of pension plans ended up roughly where they started in 2020, but it was a very bumpy road,” says Gavin Benjamin, a retirement and financial solutions partner at LifeWorks Inc. “[Last year] was actually a very good year for pension plan sponsors. Equity markets were strong, which increased plan assets. Long-term bond yields went up and that reduced pension liabilities. You saw good news on both sides of the balance sheet — assets and liabilities.”
As part of his role, Benjamin is on the team responsible for producing LifeWorks’ monthly pension indices, which seeks to chart the performance of a typical Canadian DB plan. Each year, the indices are reset to 100 and the exact makeup of the fictive plan’s portfolio is refreshed. But by keeping the indices consistent and setting the figures from March 2020 at 100, a clear — if simplified — picture of what DB pension plan sponsors have seen happen in the past 24 months emerges.
“In general, equity markets performed well, which was helpful in terms of the growth of pension assets over the course of the year,” says Benjamin.
With many pension plan sponsors enjoying high solvency ratios in 2021, LifeWorks began advising plan sponsors to consider de-risking strategies to lock in gains. According to figures provided by Sun Life Financial Inc., the total volume of annuity transactions reached $7.7 billion in 2021 — a record high. “[The increase in annuity market transactions in 2021 came as] a response to a trend of more and more sponsors of DB pension plans looking to de-risk over time and the annuity market is one of the most effective ways of de-risking,” says Benjamin.
As pension plan sponsors enter the third year of the pandemic, a new threat looms. According to Donny Kranson, portfolio manager at Vontobel Asset Management, the invasion of Ukraine could prove more significant to global markets over the course of the next 12 months than the pandemic itself.
“I think, this year, the bigger deal isn’t the post-COVID-19 reopening. It’s more tied to the rate increases coming at the same time as supply constraints tied to the geopolitical situation in Eastern Europe.”
Since the invasion began in February, Canada’s major public sector institutional investors have either announced plans to divest Russian assets from portfolios or issued statements confirming they have no direct exposure to the Eurasian nuclear power’s economy. “It’s not pretty,” says Kranson. “[Russia is] out of the indices right now — and has been put in its own bucket. That said, there are countries that go in and out of indexes. It’s out today, but it could return tomorrow.”
These efforts to divest have been hindered by the Russian government, which passed legislation preventing the trading of Russian assets by foreign investors — leaving more than $300 million in Canadian pension plan assets stranded. But the risks to the global economy aren’t limited to Eastern Europe. The Ukraine-Russia conflict appears likely to raise prices around the globe.
“Russia and Ukraine are big commodity producers,” says Kranson. “Increasing raw materials costs could affect inflation and will effect consumer and business confidence. . . . Inflation was already high because of supply constraints and increased demand. In general, you’ll see fewer rate rises from central banks. The rate of increases is likely to be slower because of what is happening.”