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Even the Canadian Pension System Isn’t Immune to the Bear Market

The Canadians, considered among the best investors in the world, lost almost 9 percent on average in the second quarter.

Canadian pension plans are viewed as among the most sophisticated allocators, with an enviable investment model. But, just like their U.S. counterparts, Canadian pensions plans didn’t escape the market decline.

During the second quarter of 2022, Canadian pension plans saw steep declines in line with those of U.S. pension plans. According to data from the Northern Trust Canada Universe, the median Canadian pension plan fell 8.8 percent in the second quarter and 14.5 percent year-over-year. 

The second quarter marked the global economy’s descent into a bear market after a nearly 13-year long bull market. Canadian and U.S. equities declined over the period, 13.2 percent and 13.4 percent, respectively. All sectors experienced losses in both the Canadian and U.S. markets. 

Additionally, with surges in inflation, fears of a looming recession, and sharp declines in commodity pricing, cryptocurrencies, and bond yields, U.S pension plans also felt the pain of the current economic environment. U.S. public pension plans are expected to have average loss of 10.4 percent for the fiscal year 2022, Institutional Investor previously reported. This is the first annual loss since 2009. 

“The most recent quarter served as a reminder of how rapidly markets can shift course,” Katie Pries, president and chief executive officer of Northern Trust Canada, said in a statement. “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.” 

Pries added that although rising interest rates create market uncertainty — and a potential decline in the value of pension assets — higher rates can also lower the amount a pension needs to put aside to meet promises to beneficiaries. Pries said higher interest rates theoretically improve pension funding ratios and the overall financial health of plans — a “cushion through this volatile period.” 

While both U.S. and Canadian pension plans were not immune to the most recent market downturn, Canadian plans have broadly been seen as more sophisticated than American funds. In the 2021 Mercer CFA Institute Global Pension Index, which grades the world’s pension systems, Canada received an overall index value of 69.8, indicating that the pension system “has a sound structure, with many good features, but has some areas for improvement that differentiates it from an A-grade system.” 

The U.S. received an overall index value of 61.4, putting it in a group of pension systems that “has some good features, but also has major risks and/or shortcomings that should be addressed. Without these improvements, its efficacy and/or long-term sustainability can be questioned.” 

Despite these different quality ratings, neither retirement system could withstand the pain of the bear market in the second quarter.

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