Canada’s defined benefit pension plans saw average losses of 5.5 per cent in the first quarter of 2022, according to a new report by RBC Investor and Treasury Services.
During the quarter, DB plans saw their largest overall contraction of worth since the first quarter of 2020. In a press release, Niki Zaphiratos, managing director of asset owners at RBC Investor and Treasury Services, said the losses could be blamed on growing economic and geopolitical volatility.
“The market experienced growing economic and geopolitical uncertainties during the first quarter of 2022. Russia’s invasion of Ukraine has amplified existing investor anxiety over growing inflationary pressures and the [coronavirus] crisis.”
During the quarter, growth seekers with large allocations to foreign equities experienced particularly severe losses, according to the report. Global equity markets experienced significant volatility, leading the MSCI world index to dip by 6.2 per cent and the MSCI world growth index to drop by 10.7 per cent.
Domestic stocks, as well as value stocks, performed better. The S&P/TSX composite index added 3.8 per cent to its value, while the MSCI world value index dipped by just 1.8 per cent.
Institutional investors with large allocations to foreign equities and growth stocks could pay even higher risk premiums in the rest of the year, noted the report. “The current geopolitical risk has compounded the existing headwinds facing pension plans and we are now looking at the possibility of a sharp increase in interest rates which could lead to the devaluation of risky assets,” said Zaphiratos.
As central banks adopted more conservative mandates to combat inflation, bond yields moved up across the yield curve. In turn, the FTSE Canada universe bond index reported seven per cent losses during the quarter. Among DB pension plans in the RBC all plan universe Canadian fixed income index, fixed income losses averaged 9.8 per cent.
The Financial Services Regulatory Authority of Ontario released a rosier picture of the first quarter of 2022, finding 85 per cent of Ontario DB plans maintained asset-to-liability solvency ratios during the first quarter of 2021.
The last time the majority of plans in Ontario had solvency ratios below 100 per cent was in December 2009. In a press release, the FRSA said, despite the relative health of Ontario’s DB plans, sponsors should pay particular attention to their governance frameworks.
“While this is an encouraging sign, plan sponsors and administrators are expected to have an effective governance framework in place and a good understanding of the risks facing the plan. This will enhance a pension plan’s ability to withstand periodic stresses.”