Increased volatility in the financial markets over the past few months have led to a cautious view about equity returns this year, according to a survey.

Respondents to Watson Wyatt’s 27th Annual Canadian Survey of Economic Expectations expect returns of 5% this year, significantly below the mid- and long-term projections of 8%. Also, more than 20% of participants expect a market correction this year, compared to just 3% in 2007.

Market volatility is one reason that investors are seeking ways to improve performance, said Janet Rabovsky, the company’s investment consulting leader for Central Canada, at the presentation in Toronto on Wednesday. Survey results indicated that “manager skill” will be the leading driver of future returns in the years to come.

In terms of pensions, the median predicted return on typically invested defined benefit (DB) plan—before expenses—is 5.3% in 2008, rising toward 6.7% in the long term. .

Still, long bond yields are not expected to return to levels seen a few years ago and the range of forecasts is an indication of potential cost volatility. “Volatility is what drives the pension world these days,” said Ian Markham, director, pension innovation at Watson Wyatt.

The cost volatility will also affect defined contribution (DC) plan members. Being unable to predict the amount of their retirement income means that human resource officers will find it increasingly hard to do workforce planning, not knowing in advance when their employees might choose to retire.

As for the economy, participants in the survey predict it will experience a slowdown in 2008 but are optimistic it will rebound in 2009.

The real gross domestic product growth rate is expected to fall below 2.5%. Weak demand for exports will have the greatest effect on GDP while domestic consumption is expected to remain the main source of growth, supported by the buoyant labour market and healthy wage gains.

The good news is that the brief deceleration in the economy will have little impact on the labour market. None of the survey respondents foresee an unemployment rate above 6.5%. Vast improvements in labour productivity will be a major factor in the economy’s revival in 2009.

The results of the survey are based on the projections of economists and portfolio managers from 42 organizations, including banks, investment management firms and other corporations.

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