Weak global economy hurts Canadian defined benefit pension returns

Unfortunately, a flagging global economy and the ongoing saga that is the Eurozone debt crisis have put a dent in Canadian defined benefit (DB) pension plans of late.

According to RBC Investor Services, Canadian pension plans gave back some of their first quarter returns in the second quarter of 2012, as a weakening global economy pushed Canadian equities lower.

With an estimated $1.2 trillion invested in pensions in Canada, and 95 per cent of those being DB pension plans, millions of Canucks rely on the performance of DB pension plans as a key pillar to their overall retirement strategies.

"What's important to realize is that these plans are managed by professionals and these people are doing a good job of trying to mitigate the damage of world events," explains Scott MacDonald, head, pensions, insurance, and sovereign wealth strategy, for RBC Investor Services in Toronto. "But you still need to be aware that global events will still have an impact on Canadian pension plans."

A DB pension plan is a type of pension in which an employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age. By contrast, a defined contribution (DC) pension plan is a type of retirement plan in which the amount of the employer's annual contribution is specified and investment of the funds is generally directed by the employees, similar to managing a personal RRSP.

"We've been dealing with some form of financial crisis or another over the last three years now and sometimes it varies from one sector or geography to another," he adds. "It depends on where a particular pension plan has its assets invested as global events can impact different plans differently over time but overall we had two good quarters in a row for Canadian pension plans which is a good sign."

MacDonald says these latest figures are indeed disappointing but it wasn't unexpected.

"We weren't surprised by these latest results. We were quite happy that our two quarterly results we issued showed Canadian pensions were gaining ground," he continues. "We were already pretty sure that by the time the second quarter was counted that the results would be down because of what's happening in Europe and this is really a reflection of all the activity that was going on in the second quarter.

"Hopefully, it'll get better in the coming quarters but it's a slow process. You're not going to see plans returning 20 per cent in the black next quarter and all problems will be solved."

Within the $410 billion RBC Investor Services All Plan universe, Canadian DB pensions fell 1.1 per cent in the second quarter ending June 30, 2012, after gaining 4.5 per cent in the first quarter of this year.

Domestic bonds were the best performing asset class for the quarter, with the median pension return of 2.4 per cent marginally outperforming the DEX Universe Bond Index by 0.1 per cent. Long-term bonds were up four per cent, making them the best performing sector in the DEX Universe for the second quarter -- the DEX tracks the performance of investment-grade government and corporate bonds in Canada.

Canadian equities were the worst performing asset class for the quarter, with the S&P/TSX Composite falling by 5.7 per cent in the second quarter, wiping out its first quarter gains of 4.4 per cent to end 1.5 per cent lower over the first half of the year.

"These defined benefit pension plans are managed by professionals and Canadians should have confidence that although world events do impact, and often negatively lately, their Canadian pension plans, these professional managers are mitigating the damage," he says. "When it comes to individual Canadians and their own investments, in particular in defined contribution pension plans where a lot more onus is on the individual to make decisions about asset mix and allocations, it's certainly a challenge in these conditions.

"Regardless as to whether yours is a DB or a DC pension … the individual member should still try to take advantage of the communication materials their employers are putting out to explain how their own plan is performing relative to these medians across the market."

Unfortunately, not every Canadian can look forward to being provided for by way of a gold-plated pension like most members of Parliament. Meanwhile, for those relying on Canada's public pension system, it's worthwhile to note the reforms to the Canada Pension Plan are generally considered to be moving in the right direction.