But rising interest rates have eased pension liabilities
By Emily Holbrook
The total value of global institutional pension fund assets has reached a new record: $56.6 trillion at the end of 2021. According to Thinking Ahead Institute’s Global Pension Assets Study, the 22 largest pension markets (P22) experienced year-on-year growth of 6.9% in 2021, increasing from $52.9 trillion to the most recent value of $56.6 trillion. This represents almost double asset growth since 2011, when the value stood at $29.3 trillion.
Lower Returns Kick Off 2022
While 2021 was a year of record pension performance globally, 2022 is off to a rocky start, especially for Canadian plans. According to Northern Trust Canada, the median Canadian pension plan returned -6.4% during the first quarter of 2022.
“The negative median return amongst Canadian Defined Benefit (DB) Plans was largely attributed to poor fixed income and foreign equity returns over the first quarter,” said Katie Pries, President and CEO of Northern Trust Canada. “In contrast, Canadian equities benefited from its high commodity exposure and delivered a positive 3.8% index return for the first quarter.”
Pries notes there is no single driving factor, but a combination of persistent inflation, rising interest rates, the war in Ukraine, and a resurgence of COVID-19 cases around the world that has created a negative sentiment across financial markets. Pandemic-related lockdowns in China also contributed to fears surrounding supply chains. As a number of central banks responded with a monetary tightening tone during the quarter, the Canadian equity market held up well with the S&P/TSX composite, generating a positive return in contrast to negative results posted by global peer indices for the quarter, Northern Trust noted. In fact, the Canadian equities market, thanks to its large exposure to commodities, was the only developed equities market to finish in positive territory for the quarter.
The Canadian bond market felt the wave of rising yields and a recent inversion of the U.S. yield curve, as bonds posted negative returns for the period. This is due to central banks signaling aggressive action to combat inflationary pressures.
Measuring Performance
Pries advised that pension funds should not be judged strictly on absolute performance, but on the sustainability of returns to meet pension liabilities.
Katie Pries
“Canada’s pension managers have a history of pension design innovation and risk management, supported by a strong governance framework in the pension industry,” said Pries. “In addition, we continue to see consolidation of smaller pension fund assets with larger funds, which in turn allows them to access a larger universe of investment opportunities. Moreover, for DB pension plans, the change in the value of the liabilities is as important as the change in the value of assets, since taken together they determine the funded position to meet the liabilities. The recent rise in interest rates has provided relief to pension liabilities. So, despite a very tough market environment, the funded position for Canadian DB plans has generally improved over the last quarter.”
The growing economic and geopolitical uncertainties, which have now spilled over to the second quarter of 2022, show no signs of retreating. While these market conditions may present a difficult situation for Canadian pension plans, Pries notes it can also be an opportunity to improve operationally.
“The rising inflationary environment can introduce challenges for pension fund operating costs as well as investment strategy,” said Pries. “This scenario can present an opportunity for pension funds to revisit their operational infrastructure and leverage relationships with service partners that have the resources and technology to create additional efficiencies.”
Emily Holbrook serves as owner and head content creator at Red Label Writing LLC, a content studio that collaborates primarily with the insurance and financial services sectors.
