Canadian DB pensions finish 2018 in negative territory: reports

Canadian defined benefit pension plans finished 2018 in negative territory, according to two new reports.

Pension plans in RBC Investor & Treasury Services’ universe posted an annual return of negative 0.7 per cent, reversing gains from the previous three quarters of the year, and substantially lower than 2017’s annual return of 9.7 per cent.

Canadian equities and the TSX composite index were hit hard in the fourth quarter of 2018, returning negative 10.6 and  negative 10.1 per cent, respectively. Higher interest rates and lower oil prices contributed to the loss, according to RBC, while eight of the 11 sectors on the TSX also posted loses for the year.

Read: Canadian DB pensions post positive, yet muted returns in second quarter

“Geopolitical and economic uncertainty reverberated through the market all year,” said Ryan Silva, director and head of pension and insurance segments for global client coverage at RBC Investor & Treasury Services, in a press release. “Trade wars, rate hikes, oil prices and Brexit helped contribute to lower earnings expectations, which drove returns sharply lower in Q4 and for the year.

“With the Fed pausing on rate hikes, as well as trade negotiations between the U.S. and China showing progress in January, markets have started the year strong, but investors need to remain vigilant as we are approaching the end of the market cycle and volatility is unlikely to go away.”

Canadian DB plans in Northern Trust Canada’s universe also saw a decline in the fourth quarter and closed the year with a median return of negative 3.5 per cent. This compares to the previous quarter’s negative 0.1 per cent and 2017’s annual return of 9.5 per cent.

Read: ‘Worst calendar year performance’ for U.S. institutional plans since 2008: report

“Equity markets wrapped up 2018 on a sour note amid slowing global growth, inflation fears, rising interest rates, U.S.-China trade war concerns, an unsettled Brexit and struggles in emerging markets,” said Arti Sharma, president and chief executive officer of Northern Trust Canada, in a press release. 

It also pointed to the downward move in commodity prices, in particular the continuous decline in the price of oil, coupled with the expectation of a more moderate growth environment going forward.

U.S. equity markets were rocked by volatility in the fourth quarter, with the S&P 500 index recording a return of  negative 8.6 per cent in Canadian dollars, according to Northern Trust’s report. However, it noted the U.S. index achieved a positive return for the year, as risks arising from the Federal Reserve’s rhetoric, trade uncertainty and the midterm elections didn’t overwhelm the gains made in a positive start to the year, which were fuelled by a tax cut. 

Read: 2018 Top 40 Money Managers Report: The Trump effect 

On the other hand, emerging markets continued to be challenged by a strong U.S. dollar, rising interest rates and unrelenting trade war tensions, according to the report, which noted the MSCI emerging markets index returned negative 2.2 per cent for the quarter and negative 6.5 per cent for the year.

And, despite a backdrop of rising interest rates, the Canadian fixed income market achieved a 1.8 per cent return in the fourth quarter and 1.4 per cent for the year, the report found.