The WTW Pension Index has increased in the fourth quarter due to positive investment returns. The asset increase was offset partially by a slight increase in liabilities. The net effect on our benchmark plan was an increase of 3.9% in the WTW Pension Index (from 91.1 to 94.7) for the quarter.
The Bank of Canada continued its aggressive increases in its overnight lending rate during Q4, in an attempt to curb inflation. They increased the rate by 1.00% during the quarter (0.50% in October, followed by another 0.50% in December) pushing the policy interest rate to 4.25% to end the quarter, the highest it has been since early 2008. The yield on 30-year Canada treasuries increased during the quarter to finish 19 bps higher than it started. Credit spreads decreased by approximately 10 bps during the quarter. The benchmark discount rate determined under the RATE:Link methodology used to determine defined benefit obligations increased by 7 bps, leading to a slight increase in accounting liability measures over the quarter when combined with the effect of interest accumulation.
| Dec. 2022 |
Sept. 2022 |
Dec. 2021 |
|
|---|---|---|---|
| Canada Treasuries(1) | |||
| 30-year | 3.28 | 3.09 | 1.68 |
| 10-year | 3.30 | 3.16 | 1.42 |
| 91-day T-bill | 4.27 | 3.64 | 0.18 |
| Corporate Bonds(1) | |||
| FTSE | 5.27 | 5.20 | 2.45 |
| Benchmark Discount Rate | 5.13 | 5.06 | 3.00 |
(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.
Global equity markets started the quarter with a boom, hitting double digit positive returns by the end of November. December saw a bit of a pull back, however the quarter still ended on a positive note. This as rising hope, from signs of peaking inflation, that central banks would succeed in their efforts to quell out of control inflation gave way to further increases in interest rates and rising risk of recession across economies. Most major global equity markets saw mid-to-high single digit returns for the quarter. Similarly, Canadian equities saw mid single digit positive returns, however they still underperformed (in local currency terms) both U.S. and International equities.
During Q4 we saw a strengthening in the CAD relative to USD which for unhedged Canadian investors decreased CAD returns on US equity investments. Conversely, we saw a weakening in the CAD relative to other international currencies which for unhedged Canadian investors increased CAD returns on international equity investments, propelling it into the mid-double digits.
Bond yields were volatile, fell to start the quarter but bounced back in mid December finishing the quarter higher than they started. Long duration bonds showed slightly negative returns for the quarter, while universe bond returns were slightly positive. Combined with the effect of falling credit spreads corporate bonds saw, with their relative shorter duration, a slightly positive return for the quarter while government bonds were slightly negative.
| Q4 2022 | YTD | Last 12 months | |
|---|---|---|---|
| Stock Returns | |||
| Canadian Equities – S&P/TSX Composite(2) | 6.0% | -5.8% | -5.8% |
| U.S. Equities – S&P 500 (Canadian dollars)(3) | 5.6% | -12.4% | -12.4% |
| Non-North American Equities – MSCI EAFE (Canadian dollars)(4) | 15.2% | -8.5% | -8.5% |
| Canadian Fixed Income Returns | |||
| 91-day T-Bills | 1.0% | 1.8% | 1.8% |
| FTSE Universe Bonds | 0.1% | -11.7% | -11.7% |
| FTSE Long Bonds | -1.0% | -21.8% | -21.8% |
(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 4.2% for the quarter. The more conservative 30% equity portfolio increased 2.2% for the quarter, and the more aggressive 70% equity portfolio increased 6.4% 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 increased over the quarter by 7 basis points to 5.13% at December 31, 2022. 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 0.3% for the quarter, reflecting the combined effect of interest accumulation and the discount rate change.
The impact of the increase in the liability discount rate together with positive investment returns resulted in a net increase in the WTW Pension Index over the quarter, from 91.1 to 94.7 as at December 31, 2022. 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 2022 | YTD | Last 12 Months | |
|---|---|---|---|
| Portfolio Returns | |||
| 30% Stocks/70% Fixed Income | 2.2% | -18.1% | -18.1% |
| 50% Stocks/50% Fixed Income | 4.2% | -15.7% | -15.7% |
| 70% Stocks/30% Fixed Income | 6.4% | -13.2% | -13.2% |
| Benchmark Plan Liability Results | |||
| Change in Pension Liability Index | 0.3% | -23.6% | -23.6% |
| Percentage Change in Pension Index | 3.9% | 10.4% | 10.4% |
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.
(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 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.
| Title | File Type | File Size |
|---|---|---|
| Pension Finance Watch – Fourth Quarter 2022 | .3 MB |
