Canadian DB pension plans see rebound off strong equity gains: reports

Canadian defined benefit pension plans recovered some of their losses from the start of 2020 in the second quarter off the back of strong public equity gains, according to the Northern Trust Canada universe.

With stimulus spending to tackle the economic impacts of the coronavirus pandemic taking effect in many countries, stock markets rebounded with double-digit gains for the second quarter.

“Despite the level of volatility witnessed over the last several months, Canadian pension plans are tracking in a positive direction, with the median plan in the Northern Trust Canada universe generating a solid 9.9 per cent gain for the second quarter,” said Katie Pries, president and chief executive officer of Northern Trust Canada, in a press release. 

Read: Canadian DB plans return negative 7.1% in first quarter

“Although there still remains a heightened level of uncertainty in the current environment as the pandemic continues to run its course, plan sponsors continue to persevere as they navigate on a path to sustainability.”

The gains made during the quarter represent a quick turnaround from the dismal losses seen by DB pensions during the first quarter of the year, when Northern Trust’s universe found plans posted a negative 7.1 per cent.

The TSX/S&P composite rose 17 per cent over the quarter, with most sectors pushing the market higher. The S&P 500 rose by 15.3 per cent; international markets, as measured by the MSCI EAFE index, returned 10.1 per cent; and the MSCI emerging markets index returned 13.1 per cent, all in Canadian dollar terms.

As for fixed income, the FTSE Canada universe bond index posted a 5.9 per cent return for the quarter, with corporate bonds taking the lead over government and provincial bonds. During the quarter, the Bank of Canada expanded its purchase program of both provincial and corporate bonds.

Read: Largest Canadian pensions should maintain Fitch ratings through crisis: report

Canadian diversified pooled fund managers also had a positive second quarter, posting a median return of 11 per cent before management fees, according to Morneau Shepell Ltd.’s universe of pension manager’s pooled funds.

Despite the strong results, the return was 1.2 per cent lower than the benchmark portfolio used by many pension plans. Further, the median year-to-date return was still a negative 0.8 per cent.

“The dramatic fall in equity and credit prices in the first quarter of 2020 was sharply reversed this following quarter as the easing of COVID-19 lockdowns and early signs of an economic recovery supported both markets,” said Jean Bergeron, partner in the asset and risk management consulting team at Morneau Shepell, in a press release. “The speed and magnitude of both the first-quarter sell-off and the subsequent rebound have been unprecedented.”

Read: A tough first quarter for Canadian pension managers’ pooled funds

Managers saw a median return of 6.6 per cent for Canadian bonds in the second quarter, beating the benchmark index by 0.7 per cent. And the median return for Canadian equity managers was 12.3 per cent, which was 4.7 per cent lower than the return for the S&P/TSX index.

“The second-quarter reversal has improved pension fund financial positions given the positive returns,” Bergeron said. “However, the higher solvency liability caused by the decrease in interest rates means that pension fund financial positions fell by an average of three per cent to 10 per cent compared to the beginning of the year.”