RBC: Canadian DB Pension Plans Performed Well in 2021

RBC (TSE: RY) Investor & Treasury Services All Plan Universe, one of the largest and most comprehensive Canadian pension universes in the industry, said that defined benefit pension plans posted a median return of 4.5% in the fourth quarter and earned an annual return of 8.9% in 2021, compared to 9.2% in 2020.

Canadian Stocks Outshine Global Stocks

Canadian equities outperformed their global counterparts with a 6.5% return in the fourth quarter of 2021. They posted an annual return of 27% at year-end. The TSX Composite Index also returned 6.5% in the fourth quarter, and produced an annual return of 25.1%. All sectors in the benchmark, except for health care, gained ground. The heavily-weighted energy (+48.9%) and financials (+36.5%) sectors led the way.

Foreign equities returned 5.3% in the fourth quarter of 2021, with an annual return of 17.1%. The strength of the Canadian dollar hampered local currency returns for unhedged pension plans. Driven by the financials and information technology sectors, the MSCI World Index posted a return of 7.5% in the fourth quarter of 2021 and 20.8% for the full year.

During the quarter, long-term bonds benefited from the flattening of the yield curve and outperformed their short-term counterparts. During the year, long-term bonds (FTSE Canada long-term index: -4.5%) underperformed short-term bonds (FTSE Canada short-term index: -0.9%).

Management Commentary

“Despite increased volatility over concerns about the Omicron variant and mounting inflationary pressures, Canadian pension plan returns were significantly boosted by their exposure to equities,” said Niki Zaphiratos, Managing Director, Asset Owners, Client Coverage, Canada, RBC Investor & Treasury Services.

“New COVID-19 variants, the Russia-Ukraine crisis, and imminent interest rate hikes – stemming from global shortages of workers and resulting inflationary pressures – introduce the potential for further volatility. Plan sponsors will have considerable risk factors to navigate in 2022.”

Wall Street’s Take

Two weeks ago, Barclays analyst John Aiken maintained a Buy rating on RY, with a price target of C$157. This implies 8.8% upside potential.

The rest of the Street is bullish on RY with a Strong Buy consensus rating based on six Buys and two Holds.

The average Royal Bank of Canada price target of C$145.57 implies 0.8% upside potential to current levels.

TipRanks’ Smart Score

RY scores a “Perfect 10” on TipRanks’ Smart Score rating system, indicating that the stock returns have strong chances to beat the overall market.

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