In 2020, public pension plans hit their highest level in 20 years.
The first quarter of 2020 was awful for pension plans. During the pandemic, markets crashed and dragged down returns. Annual reports from top-performing plans in Canada showed returns were much lower than anticipated. For 2019-2020, PSP Investments (the investment manager for the public service pension plan since 2000) reported a negative return of 0.6 per cent. The CPP Investment Board (CPPIB) had a slightly better return at 3.1 per cent, though that was still its worst performance since the 2008 financial crisis. The CPPIB’s returns had reached 12.6 per cent for 2019, before the pandemic.
“I wasn’t in the investment world for Black Monday in 1987, but I saw the dot-com crash, how SARS affected the markets in Asia,” said former CPPIB CEO Mark Machin at the time. “But I’d have to have been born 100 years ago to have seen something like this.”
Things were not looking good, but it’s amazing what can change in a year. Throughout 2020 and early 2021, plans recovered most of their losses, and turned in record-breaking returns. Of the largest Canadian pension plans, only OMERS reported a loss of 2.7 per cent.
On May 20, 2021, the CPPIB released its annual report for the fiscal year ending on March 31, 2021. It finished the fiscal year with net assets totalling $497.2 billion, compared to $409.6 billion at the end of fiscal 2020. This represented a 20.4-per-cent return net of all costs (compared to 3.1 per cent in 2020,) the highest return since the CPPIB’s inception. This increased the 10-year annualized return to 10.8 per cent and the five-year return to 11 per cent. The Public Sector Pension Investment Board’s (PSP Investments) annual report was also positive, with net assets of $204.5 billion (compared to $169.8 billion at the end of 2020.) This was an 18.4-per-cent return net of all costs (compared to a decline of 0.6 per cent in 2020.)
According to Mercer Canada Ltd., despite the negative returns in the first quarter of 2020, the funded positions of defined benefit pension plans improved significantly, hitting their highest levels in 20 years. The first quarter of 2021 was remarkable. Mercer’s Pension Health Index, which represents the solvency ratio of a hypothetical defined benefit plan, increased from 114 per cent at the end of 2020 to 124 per cent at the end of March 2021. Britain's Aon, meanwhile, found that the aggregate funded ratio for Canadian pension plans in the S&P/TSX Composite Index increased from 89.4 per cent to 94.8 per cent in the first quarter of 2021.
There are a few reasons for this. For one thing, equity markets performed exceptionally well throughout the last quarter of 2020 and the first quarter of 2021 and there was a sharp increase in bond yields (the 30-year bond yield reached its highest level of the past two years), which decreased liabilities.
As vaccination rates climb and travel and commerce ramp up, there continues to be optimism on the horizon.