The 11 largest pension funds in Canada, which managed CAD1.7 trillion of net assets at year-end 2019, are expected to withstand market downturns within their respective ratings given their long-term investment horizons, ability to adjust contribution rates and the captive nature of inflows, Fitch Ratings says. However, near-term valuations and returns are expected to be pressured from the economic fallout of the coronavirus pandemic, given the breadth and global nature of its impact. Fund performance will depend on asset mix, which is largely influenced by a plan’s maturity and risk appetite.

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Ratings reflect exceptionally strong asset overcollateralization and liquidity levels, the creditor priority of debtholders to pensioners, captive inflows, solid investment track records and relatively stable interest and dividend income. Reflecting the structural and financial profile strengths of the Canadian pension plan model, the ‘AAA’ ratings and Stable Rating Outlooks assigned to CDPQ and OMERS remain unaffected by the coronavirus pandemic.

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Canadian pension plans generally increased their exposure to private assets in recent years, including private credit, private equity (PE), real estate (RE) and infrastructure investments, to capitalize on the illiquidity premium. RE and infrastructure investments can also provide an inflation hedge and, potentially, recurring income. While the illiquidity of these investments can lead to higher returns, they can also yield more concentrated exposures to individual companies or subsectors if not carefully managed.

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