Canadian pension plans suffered the steepest annual decline on record as global equity markets continued to plunge in the fourth quarter of 2008, according to a survey released by RBC Dexia Investor Services.

Within the $310 billion RBC Dexia universe, pension assets fell 7% in the quarter ending December 2008, pushing 12-month losses to 15.9%.

“The last two quarters of 2008 were particularly brutal, but the pull-back actually started in the summer of 2007,” says Don McDougall, director of advisory services for RBC Dexia.

“The dismal outcome for 2008 eclipses the previous annual record set in 1974 when pension portfolios shrank by 12.7%,” according to McDougall. “Mind you, pension performance data goes back only to the early 1960’s. Before that, we would have to look to the Great Depression of 1929-32, but figures are sketchy. Pensions were uncommon in that era and, in any case, equity exposure would have been quite limited.”

Domestic equity was the hardest hit asset class as the S&P/TSX composite index lost 33.0% over the year. “Pensions fared a little better, outperforming the index by 1.5% on the strength of their holdings in consumer staples — the only sector to remain unscathed,” says McDougall. All other sectors retreated, shedding between 21.1 and 48.4% from the start of the year. Financials, the last major group to succumb, tumbled 29.6% in the final quarter, as the S&P/TSX dropped 22.7%.

In Canadian dollar terms, global equities lost 27.8% for the year, lagging the MSCI world index by 1.9%. “Most pension funds remained under-exposed to the U.S. market,” says McDougall.

With many global stock markets reporting record declines in 2008, the MSCI world index sank 38.7% in local currency terms. “However, fortunately for unhedged Canadian investors, the weaker loonie went a long way to soften the blow,” explains McDougall. In the fourth quarter alone, the Canadian dollar depreciated by 12.9% against a basket of world currencies.

Thanks to a late fourth quarter rally, Canadian bonds earned 4.5% for the year — although this fell short of the 6.4% gain in the DEX universe broad market benchmark. “Shorter duration bonds prevailed. Credit quality was king across all maturity categories. Long-term federal bonds outdid long-term corporate debt by 24% for the year,” says McDougall.

IE