Canadian pension plans steady despite Brexit uncertainty

Canadian pension funds seem to have fared well despite the short-term market volatility that ensued following Britain’s vote to leave the European Union, but a CFA Institute survey shows many investment professionals expect uncertainty to continue.

A survey of more than 2,000 global investment professionals found that a majority expect Britain’s exit from the European Union to result in market uncertainty for at least a year and 44 per cent foresee it doing so for more than a year.

Renegotiating the terms of Britain’s relationship with the European Union could stretch for years, says Kurt Reiman, chief investment strategist at Blackrock Canada.

Read: Median solvency ratio of Ontario pension plans rises 2%: FSCO

While volatility declined following a brief spike in late June, Reiman says that weak economic activity and stretched valuations, among other factors, “suggest that financial market volatility will move higher in the second half of 2016.”

In addition, the financial professionals surveyed by the CFA Institute expect Britain’s decision to leave the European Union will result in the country’s fragmentation (59 per cent); exits of other European union countries (48 per cent); and reduced British presence in local markets (more than 50 per cent).

Despite the uncertainty, many Canadian pension plans have remained relatively stable. In its regular tracking of 449 defined benefit pension plans, Aon Hewitt found that as of July 28, 2016, the median solvency of funds stood at 85.3 per cent. That represented a minor drop from 85.4 per cent on June 30.

Read: What are British pension plans’ top post-Brexit concerns?

Nevertheless, pension funds still face the challenge of low interest rates, in part due to the heightened economic uncertainty, says Reiman.

“With economic activity stuck in low gear and interest rates lower for even longer, pension funds will have to further recalibrate their long-term return targets to something more modest than what prevailed even earlier this year.”