An RBC Investor Services survey of 200 pension plans with over $410-billion in assets under management showed investment returns averaged 9.4 per cent in 2012, a significant improvement over returns of 0.5 per cent in 2011.Getty Images/iStockphoto
Canadian pension plans posted strong gains on their investment portfolios in 2012, but the improvement was not enough to erase years of accumulating shortfalls.
An RBC Investor Services Ltd. survey of 200 pension plans with over $410-billion in assets under management showed investment returns averaged 9.4 per cent in 2012, a significant improvement over returns of 0.5 per cent in 2011 but slightly shy of 2010 returns of 10.4 per cent.
Scott MacDonald, head of pensions for RBC Investor Services, said investment gains are allowing pension plans "to breathe easier" in 2013, even though returns slowed in the fourth quarter last year to 2.5 per cent from 3.2 per cent in the third quarter.
"Amid the doom and gloom, there was good investment performance and that is chipping away at some of the solvency issues, so that's a good thing," Mr. MacDonald said in an interview. "However, that on its own isn't going to solve all the problems."
Pension plans have seen their funding erode in recent years because they must calculate their pension funding obligations based on interest rate values, which have declined steadily. Lower interest rates mean more money must be set aside to fund pensions, which has hurt the solvency of plans even in years when they have made gains on their investments.
A report in early January by pension consulting firm Aon Hewitt said average pension plans in Canada were just 69 per cent funded at the end of 2012, a tiny improvement from 68 per cent a year earlier. The company said interest rates fell further in 2012 which hurt plan funding, but the impact was offset by stronger investment returns.
The RBC survey, which bills itself as Canada's most comprehensive survey of pension funds, said pension managers on average outperformed passive indexes last year, which is typically a key measure of success for money managers.
Equity holdings, for example, outperformed the MSCI World index of stocks by 1.4 per cent in 2012. Bond holdings outperformed the DEX Universe Bond Index by 0.9 per cent while real estate assets climbed by over 10 per cent in value.
Mr. MacDonald said a growing number of smaller pension plans are shifting investments out of stocks and bonds and into real estate and other "alternatives" because they have seen the strong gains on those assets for Canada's largest pension plans.
"The smaller and medium-sized plans are looking for ways to replicate that as much as they can," he said. "But it's more costly for them to do it, and they typically lack enough internal expertise to just flip a switch and start investing more in those asset classes."
Mr. MacDonald said pension plans are also seeking higher returns by shifting more of their bonds from government bonds to corporate bonds, which typically pay a higher rate of return.
"Within the asset allocations they already have, they're making some adjustments to take on a little more risk," he said. "So you can see that they've relied a little more on investing in corporate bonds as opposed to government bonds, and that has helped them achieve that out-performance over the index."
Janet McFarland