The WTW Pension Index has increased in the third quarter, as a decrease in accounting liability measures was partially offset by negative asset returns. The net effect on our benchmark plan was an increase of 2.9% in the WTW Pension Index (from 96.6 to 99.4) for the quarter.
The Bank of Canada increased its overnight lending rate by 0.25% in early July bringing the policy rate to 5.0%. It maintained the rate at this level through the quarter while continuing its policy of quantitative tightening. However, the yield on 30-year Canada treasuries increased during the quarter to finish 72 bps higher than it started, as concerns have increased that interest rates might remain higher for longer than anticipated. Credit spreads stayed relatively flat during the quarter, contracting by only 4 bps. The benchmark discount rate determined under the RATE:Link methodology used to determine defined benefit obligations increased by 75 bps, which combined with the effect of interest accumulation led to a decrease in accounting liability measures over the quarter.
| Sep. 2023 |
Jun. 2023 |
Sep. 2022 |
|
|---|---|---|---|
| Canada Treasuries(1) | |||
| 30-year | 3.81 | 3.09 | 3.09 |
| 10-year | 4.03 | 3.26 | 3.16 |
| 91-day T-bill | 5.13 | 4.92 | 3.64 |
| Corporate Bonds(1) | |||
| FTSE | 5.90 | 5.36 | 5.20 |
| Benchmark Discount Rate |
5.63 | 4.88 | 5.06 |
Global equity markets started the quarter on a positive note in July but took a negative turn in August and had a typically difficult September with a sharp rise in yields and oil prices and related concerns about economic growth. Most major global equity markets saw low single digit negative returns for the quarter. Similarly, Canadian equities saw low single digit negative returns (-2.2%), led by the communication sector which posted -12.6% returns. However, with oil prices increasing materially and due to Canada’s high concentration in energy markets (one of the best performing sectors of the quarter, +10.3%), it overperformed against US equities (-3.3%) but still underperformed against international equities (-1.3%), in local currency terms.
The CAD continued to strengthen relative to major global currencies, other than to the USD, leading unhedged Canadian investors to see CAD returns improved on US equity investments but dampened on international equity investments during Q3.
The mid and long parts of the yield curve saw sharp increases during the quarter, leading to negative returns in major Canadian bond indices. With the increase in yields, long term bonds were most negatively impacted over the quarter.
While all bonds saw negative returns for the quarter, due to their higher yields and shorter duration corporate bonds outperformed relative to government bonds, in a stable credit spreads and rising yield environment.
| Q3 2023 | YTD | Last 12 months | |
|---|---|---|---|
| Stock Returns | |||
| Canadian Equities – S&P/TSX Composite (2) - | 2.2% | 3.4% | 9.5% |
| U.S. Equities – S&P 500 (Canadian dollars) (3) | -1.0% | 13.2% | 19.5% |
| Non-North American Equities – MSCI EAFE (Canadian dollars) (4) | -1.8% | 7.2% | 23.5% |
| Canadian Fixed Income Returns | |||
| 91-day T-Bills | 1.2% | 3.4% | 4.4% |
| FTSE Universe Bonds | -3.9% | -1.5% | -1.4% |
| FTSE Long Bonds | -9.5% | -4.6% | -5.6% |
The benchmark plan’s 50% equity / 50% fixed income portfolio decreased 5.5% for the quarter. The more conservative 30% equity portfolio decreased 7.1% for the quarter, and the more aggressive 70% equity portfolio decreased 3.9% for the third 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 75 basis points to 5.63% at September 30, 2023. 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 decreased by 8.2% for the quarter, reflecting the combined effect of interest accumulation and the benchmark discount rate change.
The decrease in accounting liability measures were partially offset by negative investment returns resulting in a net increase in the WTW Pension Index over the quarter, from 96.6 to 99.4 as at September 30, 2023. 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.
| Q3 2023 | YTD | Last 12 Months | |
|---|---|---|---|
| Portfolio Returns | |||
| 30% Stocks/70% Fixed Income | -7.1% | -0.6% | 1.5% |
| 50% Stocks/50% Fixed Income | -5.5% | 2.0% | 6.4% |
| 70% Stocks/30% Fixed Income | -3.9% | 4.7% | 11.4% |
| Benchmark Plan Liability Results | |||
| Change in Pension Liability Index | -8.2% | -2.8% | -2.5% |
| Percentage Change in Pension Index | 2.9% | 5.0% | 9.0% |
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.
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.
1 Regulations on COVID-19 vaccine and testing requirements issuedInformation 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.
2 Source: Bloomberg LP. All S&P/TSX Composite indices are registered trademarks of The Toronto Stock Exchange Inc. and Standard & Poor’s Corporation.
3 Source: 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..
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.
| Title | File Type | File Size |
|---|---|---|
| Pension Finance Watch – Third Quarter 2023 | .3 MB |
