Canada’s pension plans are well positioned to succeed in a high inflation environment though stagflation remains a significant threat, according to a new report from Fitch Ratings.
“The maturing nature of participant bases increases pension funds’ reliance on investment returns, as contributions and income from active members may be outpaced by benefits paid to a growing number of retirees,” said a press release. “Still, Canadian pension funds’ long-term investment horizons, captive inflows, relatively predictable outflows, asset diversification and strong liquidity remain supportive of assigned AAA ratings and stable ratings outlooks.”
The report was published shortly after Statistics Canada revealed year-over-year inflation reached 6.8 per cent at the end of April, up from 6.7 per cent in March. It’s the highest rate recorded since January 1991, when inflation reached 6.9 per cent.
Food prices rose particularly sharply, with Canadians paying 9.7 per cent, the highest spike in food prices since September 1981. Despite this, the cost of food in restaurants was up just 6.6 per cent indicating that restauranteurs are absorbing a portion of the cost increases.
Cereal-based products saw the highest price rises. With Russia and Ukraine — the third and seventh largest producers of wheat — at war, the cost of bread rose 12.2 per cent, while pasta gained 19.6 per cent and rice added 7.4 per cent.
The conflict wasn’t the only reason for increased prices. Poor weather in growing regions around the world has also impacted prices on all food, as have rises in petroleum and natural gas prices, which rose 22.2 per cent and 64.4 per cent, respectively. In the U.S., overall inflation was more acute, reaching 8.3 per cent in April, according to the Bureau of Labor Statistics. U.S. food prices rose 9.4 per cent, slightly more slowly than in Canada.
According to the Fitch report, Canadian pension funds’ credit portfolios, comprised of a significant amount of floating-rate investments, will likely benefit from the high inflation environment. It also concluded allocations to real estate and infrastructure investments will serve as an effective hedge against inflation in certain sectors.
“Fitch believes pension funds’ long-term focus and ability to adjust contribution rates or moderate inflation adjustments on benefits enable them to generally withstand market downturns better than most other fund structures; however, slower economic growth could pressure investment returns across the portfolio.”