The WTW Pension Index has decreased slightly in the fourth quarter, as positive asset returns were offset by a decrease in discount rates. The net effect on our benchmark plan was a decrease of 0.3% in the WTW Pension Index (from 86.1 to 85.8) for the quarter.
WTW Pension Index
The Bank of Canada maintained its overnight lending rate at 0.25% through Q4. The yield on 30-year Canada treasuries increased slightly to start the quarter and stayed in that range for most of the quarter before tending down to finish 30bps lower than it started. Credit spreads stayed relatively flat during the quarter. The benchmark discount rate determined under the RATE:Link methodology used to determine defined benefit obligations decreased by 32 bps, leading to an increase in accounting liability measures over the quarter.
Key Bond Yields (at end of month)
| Dec. 2021 |
Sep. 2021 |
Dec. 2020 |
|
|---|---|---|---|
| Canada Treasuries(1) | |||
| 30-year | 1.68 | 1.98 | 1.21 |
| 10-year | 1.42 | 1.51 | 0.67 |
| 91-day T-bill | 0.18 | 0.14 | 0.09 |
| Corporate Bonds(1) | |||
| FTSE | 2.45 | 2.29 | 1.71 |
| Benchmark Discount Rate | 3.00 | 3.32 | 2.62 |
1) Information prior to June 2015 and FTSE Corporate bond yield provided by FTSE Global Debt Capital Markets Inc. Copyright © FTSE Global Debt Capital Markets Inc. All rights reserved. The information contained herein may not be redistributed, sold or modified or used to create any derivative work without the prior written consent of FTSE Global Debt Capital Markets Inc. Effective June 2015, Canada 10 and 30 year yield were obtained from the Bank of Canada; the 91-day T-bill yield was obtained from Scotiabank.
Canada outperformed International equities with both posting low-mid single digit returns.
Despite resurging COVID cases global equity markets posted yet another positive return for the seventh quarter in a row. US markets led the way with double digit returns, while Canada outperformed International equities with both posting low-mid single digit returns (respectively 11.0%, 6.5% and 3.9% in local currencies). In December, the US federal reserve acknowledged that inflation was elevated and may persist longer than previously anticipated. As a result, the US federal reserve is expected to aggressively dial back its bond buying to fight inflation. The market is also expecting up to four interest rate hikes in 2022, with the first expected as early as March 2022. The bank of Canada views the economy as still needing considerable monetary support and will continue to hold its policy interest rate at the effective lower bound until its inflation targets are achieved. However, in light of the progress made in the economic recovery, the bank of Canada decided to end its bond buying program. During Q4 we saw a strengthening in the CAD relative to USD and other international currencies which, for unhedged Canadian investors, decreased CAD returns on US and international equity investments.
Short duration bonds saw slightly negative returns as short term yields surged while most mid and long duration bonds saw positive returns with the falling yields. Corporate bonds outperformed government bonds.
| Q4 2021 | YTD | Last 12 months | |
|---|---|---|---|
| Stock Returns | |||
| Canadian Equities – S&P/TSX Composite(2) | 6.5% | 25.1% | 25.1% |
| U.S. Equities – S&P 500 (Canadian dollars)(3) | 10.7% | 27.5% | 27.5% |
| Non-North American Equities – MSCI EAFE (Canadian dollars)(4) | 2.4% | 10.2% | 10.2% |
| Canadian Fixed Income Returns | |||
| 91-day T-Bills | 0.1% | 0.2% | 0.2% |
| FTSE Universe Bonds | 1.5% | -2.5% | -2.5% |
| FTSE Long Bonds | 4.8% | -4.5% | -4.5% |
2) Bloomberg LP. All S&P/TSX Composite indices are registered trademarks of The Toronto Stock Exchange Inc. and Standard & Poor’s Corporation.
3) Bloomberg LP. All S&P indices are registered trademarks of Standard & Poor’s Corporation
4) Bloomberg LP. All MSCI indices are registered trademarks of Morgan Stanley Capital International Inc.
The benchmark plan’s 50% equity / 50% fixed income portfolio increased 5.6% for the quarter. The more conservative 30% equity portfolio increased 5.3% for the quarter, and the more aggressive 70% equity portfolio increased 6.0% for the quarter.
Pension plan liabilities under Canadian, International and U.S. accounting standards are measured using a discount rate based on yields available on high-quality corporate bonds as of the measurement date. Using the same RATE:Link methodology as we use for the WTW Pension Index in other countries, the discount rate for our benchmark plan decreased over the quarter by 32 basis points to 3.00% at December 31, 2021. Among other factors, the selected discount rate depends on projected plan cash flows, the bond data and the methodology utilized for constructing the yield curve. The RATE:Link approach represents one possible methodology; other acceptable methodologies may result in higher or lower discount rates, and consequently lower or higher plan liabilities.
WTW tracks the monthly change in its Pension Index in a series that dates to December 31, 2000. Like bond prices, pension liability values move in the opposite direction to interest rates. The WTW Pension Liability Index increased by 6.1% for the quarter, reflecting the combined effect of interest accumulation and the discount rate change.
The impact of the decrease in the liability discount rate together with positive investment returns resulted in a net decrease in the WTW Pension Index over the quarter, from 86.1 to 85.8 as at December 31, 2021. The change in the WTW Pension Index does not reflect any contributions made to reduce the size of any deficit or any contribution holiday taken on account of any surplus.
| Q4 2021 | YTD | Last 12 Months | |
|---|---|---|---|
| Portfolio Returns | |||
| 30% Stocks/70% Fixed Income | 5.3% | 2.4% | 2.4% |
| 50% Stocks/50% Fixed Income | 5.6% | 7.2% | 7.2% |
| 70% Stocks/30% Fixed Income | 6.0% | 12.2% | 12.2% |
| Benchmark Plan Liability Results | |||
| Change in Pension Liability Index | 6.1% | -3.0% | -3.0% |
| Percentage Change in Pension Index | -3.0% | 10.5% | 10.5% |
5) The discount rate assumption is adjusted to reflect changes in market interest rates. Our benchmark plan is a traditional final-pay pension plan with approximately half of the liabilities in respect of active employees and half of the liabilities in respect of terminated vested and retired employees. Plans with different designs or demographic characteristics will see different results in terms of both the level of appropriate discount rate and the plan’s response to changes in financial assumptions.
This report reviews how capital and equity market performance affected Canadian defined benefit pension plans, with a focus on linked asset/liability results. Specific plan results depend on liability characteristics, portfolio composition and actual investment results, among other factors.
This publication tracks the asset/liability performance of a hypothetical Canadian benchmark pension plan, based on a 50/50 asset mix and a typical liability profile. The index is not intended to represent an average funded ratio. Rather, the intent is to provide plan sponsors with a consistent and relevant measure to serve as a general indicator of the effects of capital market events on pension plan financing.
| Title | File Type | File Size |
|---|---|---|
| Pension Finance Watch – Fourth Quarter 2021 | .2 MB |
