Canadian Defined Benefit Plans Return 13.6% in 2019

Canadian defined benefit pension plans had a median return of 13.6% during 2019, thanks to a sharp increase in equity market returns in the latter part of the fourth quarter, according to data from the Northern Trust Canada Universe.

The median Canadian defined benefit plan generated a 1.9% return during the fourth quarter, which was up from 1.6% during the third quarter, despite geopolitical tensions. Northern Trust attributed the strong showing to favorable monetary policy, progress on US-China trade negotiations, and potential clarity on the path to a Brexit resolution.

“Despite a year plagued with negative headlines, fueled with uncertainty and low expectations, Canadian pension plans navigated through the turbulence and continued on a journey of positive returns” Arti Sharma, CEO of Northern Trust Canada, said in a statement. “Equity markets closed 2019 in a strong position, realizing solid double-digit gains for the year. As a result, plans in the Northern Trust Canada Universe marked a considerable improvement over the -1.0% median return in 2018.”

Canadian Equities, as measured by the S&P TSX Composite Index, increased 3.2% during the quarter and ended the year with a robust 22.9% return, its best annual return in a decade. Northern Trust said that while the labor market was soft early in the quarter, there was improvement later as employment numbers increased. It also said the November announcement by Alberta that new conventional oil wells could be drilled without government production limits was another supportive economic measure.

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But it was the IT sector that had the strongest momentum, generating a double-digit return for the quarter and ending the year as the top performing sector. US equity markets also gained momentum on positive announcements surrounding phase one of a US-China trade deal, strong economic data. And a rally in technology stocks helped as the S&P 500 reached new highs and produced a 6.8% return in Canadian dollars for the quarter, and a healthy 24.8% return for the year. A strong economy, resilient labor market, and accommodative monetary policy also contributed to the positive results for the quarter and the year, said Northern Trust.

International equities, as tracked by the MSCI EAFE Index, increased 6.0% in Canadian dollars during the final quarter and ended the year up 16.5%. Despite economic weakness in the Eurozone, the equity index closed on a positive note, which Northern Trust attributed to the UK prime minister Boris Johnson’s election victory coupled with the European Central Bank’s re-engagement in quantitative easing. All sectors in the index ended 2019 with positive returns, led by the IT and Health Care sectors both for the fourth quarter and the year.

Emerging markets investments also had a strong rally during the fourth quarter, with the MSCI Emerging Markets Index rising 9.6% in Canadian dollars for the quarter and generating a 12.9% return for the year. Despite the political tensions in Latin America and Hong Kong, emerging markets responded well to easing trade tensions between the US and China. Central bank actions in the fourth quarter in China, Brazil and Turkey aided their respective economies. All sectors in the index showed positive returns for the quarter, with the IT sector the top performer for the quarter and the year.

The Canadian fixed-income market, as represented by the FTSE Canada Universe Index, saw a 0.9% decline during the fourth quarter. However, the index still managed to generate a 6.9% return for the year despite the weakness during the quarter. During the quarter, corporate bonds outperformed both the federal and provincial sectors, and short-term bonds surpassed returns of the mid- and long-term segments, said Northern Trust.