Canadian Pensions Can Withstand Higher Inflation, Weaker Growth
Fitch-rated Canadian pension funds are well positioned to withstand higher inflation and modest economic growth amid heightened market volatility, Fitch Ratings says. That said, stagflation would be more challenging, given funds’ long-only investment strategies and vulnerability to economic and market downturns. The maturing nature of participant bases increases pension funds’ reliance on investment returns, as contributions and income from active members may be outpaced by benefits paid to a growing number of retirees. Still, Canadian pension funds’ long-term investment horizons, captive inflows, relatively predictable outflows, asset diversification and strong liquidity remain supportive of assigned ‘AAA’ ratings and Stable Rating Outlooks.
Canada’s inflation has reached the highest level in decades, which has direct implications on pension plan funding risk. Fitch expects 2023 pension payments to increase across the peer group, as annual inflationary increases are tied to Canadian CPI growth for the preceding 12-month period. Additionally, geopolitical tensions threaten global economic growth, further pressuring investment performance where future returns remain challenged by the continued competitive investment environment.
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