Canadian DB plans return negative 7.1% in first quarter

Canadian defined benefit plans saw a median return of negative 7.1 per cent in the first quarter of 2020, after enduring a historic period of market volatility and economic turmoil resulting from the global pandemic crisis, according to both the Northern Trust Canada universe and the RBC Investor and Treasury Services universe.

Northern Trust Canada noted central banks and policy-makers the world over have responded to the crisis with unprecedented monetary policy measures and spending in an effort to curb the economic and financial damage as the pandemic runs its course. 

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“Canadian pension plans demonstrated resiliency during a period of extreme market stress, with the median plan in the Northern Trust Canada universe posting a return of negative 7.1 per cent for the first quarter — a modest decline in light of the unprecedented conditions,” said Katie Pries, president and chief executive officer of Northern Trust Canada, in a press release. “In a volatile market riddled with fear, uncertainty and unpredictability, Canadian pension plan sponsors navigated through uncharted territory, seeking a path to safety for the health of their employees, as well as the preservation of their retirement pensions.”

During the first quarter, Canadian equities, as measured by the S&P/TSX composite, posted a return of negative 20.9 per cent, after hitting a record high on Feb. 20. Meanwhile, U.S. equities, as measured by the S&P 500, dropped by 11.7 per cent, in Canadian dollar terms. RBC noted that non-Canadian equity returns in domestic currency terms saw a cushion due to the weakened state of the Canadian dollar against its U.S. counterpart. As a result, unhedged exposure to such equities saw better returns in local currency terms.

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International developed markets, as measured by the MSCI EAFE index, finished the quarter in negative territory, generating a negative 15.2 per cent return in Canadian dollars. And the MSCI emerging markets index, challenged by the economic turmoil from the pandemic as well as a strong U.S. dollar, posted a negative 16.1 per cent return in Canadian dollars.

Meanwhile, bond markets afforded DB plans some relief, with the FTSE Canada universe bond index posting 1.6 per cent for the quarter. With the swift interest rate cuts by the Bank of Canada, the yield curve steepened and short-term bonds outperformed long-term instruments. RBC noted a clear flight to safety as investors sold off riskier fixed income, with the FTSE Canada high-yield index returning negative nine per cent and the FTSE Canada federal bond index performing much better at 5.1 per cent.

“It has been an exceptionally difficult period for Canadian pension plans to navigate, as the markets have been experiencing an unprecedented amount of volatility across asset classes,” said David Linds, head of Canadian asset servicing at RBC Investor and Treasury Services, in a press release. “However, the substantial monetary and fiscal policy response from governments across the globe gives us room for optimism. While it’s difficult to speculate on what may happen over the short term, we hope these measures will lead to some reawakening of our economic growth in the near future.”

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