Canadian pension plans return -8.8% in Q2 and -14.5% in first half of year

Canadian defined benefit plans posted negative investment returns in the second quarter and first half of 2022 as stock and bond markets tumbled amid rising interest rates and higher inflation, according to a news release Monday from Northern Trust Canada, a subsidiary of Northern Trust Corp.

The median Canadian pension plan returned -8.8% in the second quarter and returned -14.5% in the first half of the year, according to the Northern Trust Canada Universe. In contrast, the median Canadian pension plan returned 4.1% for the second quarter of 2021.

In discussing pension plans' poor performance in the second quarter this year, Northern Trust Canada said the period was "tumultuous" as "supply chains found pockets of recovery" and a "lingering backdrop of tight labor markets, higher wages and soaring food and energy prices continued to stoke inflation, driving it to decade highs around the globe."

In addition, Northern Trust noted in the news release, major central banks, led by the U.S. Federal Reserve, "pivoted to a more hawkish tone, initiating aggressive increases in policy interest rates at an accelerated pace in an effort to curb inflation." As markets digested the impact of a much tighter monetary policy environment, "uncertainty coupled with volatility and negative investor sentiment prevailed, with major stock markets plunging into negative territory for the quarter," the release added.

"The most recent quarter served as a reminder of how rapidly markets can shift course," stated Katie Pries, president and CEO of Northern Trust Canada, in the release. "We saw extreme market declines in the early days of the pandemic and now we are experiencing it again in the face of changing monetary policy."

Ms. Pries added that although rising interest rates "create market uncertainty causing a decline in pension assets, higher rates improve pension funding ratios and the overall financial health of pension plans, serving as a cushion through this volatile period."

The Northern Trust Canada universe tracks the performance of Canadian institutional defined benefit plans that subscribe to performance measurement services as part of Northern Trust's asset service offerings.

There are 34 pension plans in the second-quarter Canadian DB plan universe, a spokesman for Northern Trust said in an email.

Securities performances were weak across the board. Canadian equities and U.S. equities returned -13.2% and -13.4% in the second quarter, respectively, as measured by the respective S&P/TSX Composite and the S&P 500 indexes.

International developed markets, as measured by the MSCI EAFE index, returned -11.5% in the second quarter, while the MSCI Emerging Markets index returned -8.4%.

The Canadian fixed-income market, as measured by the FTSE Canada Universe Bond index, returned -5.7% in the second quarter.

Chicago-based Northern Trust Corp. had $1.3 trillion in assets under management as of June 30.