Recent interim and fiscal year results from Canadian pension funds reflect the negative impacts from the coronavirus pandemic on valuations, with underperformance in early 2020 relative to targeted returns, says Fitch Ratings. Still, funds reporting results through June 30, 2020 also reflected a subsequent rebound in performance in the equity markets and credit spread tightening in 2Q20. Long-term fund performance will depend on asset mix, which is largely influenced by a plan’s maturity and risk appetite, future market volatility and the speed and path of economic recovery.

Canadian pension funds’ strong credit profiles remain supported by their long-term investment strategies and time horizons that afford them flexibility to work through troubled investments instead of being forced sellers and the ability to adjust contribution rates as well as the captive nature of inflows.

Ratings reflect these characteristics as well as exceptionally strong asset overcollateralization and liquidity levels, creditor priority of debtholders to pensioners, captive inflows, solid investment track records and relatively stable interest and dividend income.

Fitch affirmed the ‘AAA’ ratings of Caisse de dépôt et placement du Québec (CDPQ) and OMERS Administration Corporation on July 15, 2020 while maintaining Stable Rating Outlooks for both entities. Pension funds’ ability to capitalize on investment opportunities expected to emerge over an extended period could support long-term performance.

That said, funds face a competitive investment environment, which may make it more challenging to identify attractive investments at scale. Several funds put capital to work in liquid markets in March and April and are actively deploying capital in the private markets, a continuation of a multi-year trend across the sector.

While the pandemic exposes pension funds’ outsized positions in higher risk sectors, notably travel, hospitality, retail and energy, Fitch does not expect funds to experience the same level of losses, given lower exposure to these troubled sectors compared with exposure to financials during the Great Financial Crisis (GFC). Large Canadian pension plans averaged investment losses of approximately 18% during the GFC from 2008-2009.

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