The value of a typical Canadian defined benefit pension plan’s assets declined in August, according to LifeWorks Inc.’s latest monthly report.
An investment portfolio designed to mimic typical Canadian DB portfolios saw its assets shrink by 2.4 per cent over the month. The value of the benchmark portfolio, which is composed of 50 per cent equities and 50 per cent fixed income, remained 12.9 per cent lower than at the beginning of the year. On a solvency basis, the portfolio also declined, dropping from 103.8 per cent to 102 per cent.
The overall returns were hampered by the poor performance of equities, with the MSCI ACWI index dipping 1.6 per cent over the month. Canadian equities saw similar losses, with the S&P/TSX composite index also declining 1.6 per cent.
Returns for Canadian bond indices were negative during the month, with yields on non-indexed short-term bonds increasing by 0.68 per cent and long-term term bonds by 0.25 per cent. Market expectations for long-term inflation rose by 0.06 per cent, reaching 1.78 per cent. The moderate dip followed the release of inflation data from Statistics Canada showing the consumer price index fell to 7.6 per cent on a year-to-year basis in July.
In the report, Murray Wright, associate partner in LifeWorks’ retirement and financial solutions practice, noted short-term interest rates have risen almost three per cent faster than long-term ones, causing an inverted yield curve. “When the yield curve inverts, it has historically been a good early warning signal of the onset of a recession.
“Pension plans should tread carefully when making strategic decisions based on current funding levels, in particular around contribution holidays and benefit improvements, as the economic outlook is extremely uncertain. Action can be taken to protect current funding levels, but good fiduciary education on options/impacts, strong governance and ability to act at the right time are vital.”