Northern Trust Pension Universe data: Canadian pension plan returns fell sharply in the second quarter as equity markets plummet

TORONTO–(BUSINESS WIRE). The Canada pension plan median declined -8.8% for the quarter and -14.5% year-to-date.

The second quarter of 2022 proved to be a turbulent time for the financial markets. As supply chains recovered, an ongoing backdrop of tight labor markets, higher wages and rising food and energy prices continued to fuel inflation, pushing it to a decade high globally. Many major central banks, led by the Federal Reserve, adopted a more hawkish tone, embarking on aggressive interest rate hikes at an accelerated pace to curb inflation. As markets digested the impact of a much tighter monetary policy environment, uncertainty coupled with volatility and negative investor sentiment reigned supreme and major equity markets plunged into negative territory for the quarter.

“The last quarter showed us how quickly markets can change course. We saw extreme market declines in the early days of the pandemic and now we’re experiencing them again as monetary policy shifts. Although rising interest rates create market uncertainties that lead to a decline in pension wealth, higher interest rates improve retirement funding ratios and the overall financial health of retirement plans, serving as a buffer during this volatile time,” said Katie Pries, President and CEO of Northern Trust Canada.

Northern Trust Canada’s investment universe tracks the performance of defined benefit pension plans of Canadian institutions that subscribe to performance measurement services as part of Northern Trust’s asset service offerings.

Persistent inflation and attempts by policymakers to stabilize prices have been a recurring theme in recent months. The size and pace of central bank action to contain inflation this quarter dampened investor sentiment and fueled fears of an impending recession. Aggressive rate hikes of late have resulted in significantly higher interest rates along the yield curve and pushed bond yields into negative territory. As financial markets adjusted to higher interest rate movements, equity markets around the world also saw sharp declines during the quarter.

• Canadian equities, as measured by the S&P/TSX Composite Index, lost -13.2% for the quarter. All sectors were in negative territory, with healthcare, information technology and materials the weakest returns.

• US stocks, as measured by the S&P 500 Index, fell -13.4% in CAD terms for the quarter. All sectors posted negative returns, with consumer discretionary declining the most, while consumer staples, energy and utilities lost the least over the period.

• International developed markets, as measured by the MSCI EAFE Index, returned -11.5% in CAD terms for the quarter. All sectors posted negative returns for the period, with the information technology sector being the main detractor over the period. The energy sector held up reasonably well with only a modest decline in the quarter.

• The MSCI Emerging Markets Index returned -8.4% in CAD terms for the quarter. The Consumer Discretionary sector posted a healthy positive return while all other sectors posted negative returns, with Information Technology posting the largest decline over the period.

The Canadian economy posted a record-low unemployment rate of 4.9% in June, down from 5.3% at the end of March. Canadian inflation continued to rise, reaching 7.7% (yoy) in May, up from 6.8% in April. Canada’s high inflation backdrop continued to be compounded throughout the quarter by higher gas prices and service costs.

The US economy posted healthy job growth for the quarter, with just over 1.1 million new jobs added during the period and the unemployment rate hit 3.6% in June. Rising inflation prompted the Federal Reserve (The Fed) to raise interest rates by 0.50% in May and 0.75% in June, the biggest hike in three decades. These Fed tightening moves brought the federal funding target range to 1.50-1.75%.

International markets were challenged with elevated levels of inflation during the quarter. The reduction in gas supplies from Russia raised concerns about shortages and had a significant impact on prices. To curb higher prices, the Bank of England (BoE) raised interest rates to 1.25% by the end of the quarter. The European Central Bank (ECB) surprised markets by announcing it could hike interest rates by 0.50% in September, on top of its planned 0.25% hike in July. Conversely, the Bank of Japan (BOJ) maintained its guidance of keeping interest rates at current or low levels, while keeping an eye on the potential impact of exchange rate movements on its economy.

Emerging markets declined over the quarter, but to a lesser extent than developed markets. The easing of restrictions on giant tech companies coupled with the easing of Covid restrictions brought comfort to investors as Chinese stocks rose during the quarter. The Chinese central bank refrained from lowering its key interest rate, while the Russian central bank lowered its key interest rate to 9.5%, a level observed before the Ukraine invasion.

The Bank of Canada (BoC) hiked overnight rates twice during the quarter, totaling 1%, to bring its policy rate to 1.5%. Canada’s central bank indicated that it stands ready to act more vigorously if needed to bring inflation down to its 2% target.

The Canadian bond market, as measured by the FTSE Canada Universe Bond Index, returned -5.7% for the quarter. Provincial bonds saw the largest drop, followed by corporates and Bunds. During the quarter, long-dated bonds saw the largest decline, followed by the intermediate and short-term segments of the bond market.

About Northern Trust

Northern Trust Corporation (Nasdaq: NTRS) is a leading provider of wealth management, wealth management, wealth management and banking services to corporations, institutions, wealthy families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 22 US states and Washington, DC and 23 locations in Canada, Europe, the Middle East and Asia Pacific. As of June 30, 2022, Northern Trust had US$13.7 trillion in assets under custody and US$1.3 trillion in assets under management. For more than 130 years, Northern Trust has been recognized as an industry leader for exceptional service, financial expertise, integrity and innovation. Please visit our website or follow us on Twitter.

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