Illustration and Painting

Canadian defined-benefit (DB) pension plans closed the first quarter of 2022 in the red, as geopolitics, inflation and Covid rocked the markets.

The median return of DB plans in Q1 was -5.5%, the weakest quarterly return since the first quarter of 2020 (-7.1%), according to the RBC Investor & Treasury Services All Plan Universe benchmark. The median return in the previous quarter (Q4) was 4.5%.

“The market experienced growing economic and geopolitical uncertainties during the first quarter of 2022,” said Niki Zaphiratos, managing director, asset owners, RBC Investor & Treasury Services, in a release. “Russia’s invasion of Ukraine has amplified existing investor anxiety over growing inflationary pressures and the Covid crisis.”

The MSCI World Index returned -6.2% in Q1, and foreign equities in the RBC All Plan Universe returned -7.5%. Strength in the Canadian dollar deepened some of the local currency losses for unhedged plans, RBC Investor & Treasury Services said.

The Canadian equities market (S&P/TSX Composite +3.8%) benefited from its large exposure to commodities and was the only developed equities market to finish in positive territory over the quarter. Canadian equities held by plans outperformed the broad market index and gained 3.9%, RBC said.

Within fixed income, bond yields moved up sharply across the yield curve in Q1, as central banks signalled aggressive action to combat inflationary pressures.

The FTSE Canada Universe Bond Index lost 7.0% over the quarter, as long-term bonds underperformed short term bonds. The FTSE Canada Long Term Bond Index returned -11.7%; the FTSE Canada Short Term Bond Index, -3.0%

The median RBC All Plan Universe Canadian Fixed Income return was -9.8%.

“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,” Zaphiratos said. “Plan sponsors will need to tread carefully in the months ahead.”

Despite negative returns last quarter, solvency improved for most Canadian DB plans, Mercer Canada said earlier this month. As a result of rising bond yields, the median solvency ratio of DB plans within Mercer Canada’s database increased by five percentage points in the quarter to 108%, the highest funded ratio since 2008.