Pensions well positioned to weather high inflation: Fitch

Canada’s major pension plans are capable of withstanding the environment of elevated inflation and a deteriorating growth outlook, says Fitch Ratings.

In a new report, the rating agency said that the Canadian pension plans that it rates — such as OMERS, Teachers, and HOOPP — are poised to retain their AAA ratings and stable outlooks in the face of heightened market volatility, alongside high inflation and growth pressures.

High inflation threatens to increase funding risk for pension plans, while headwinds to global economic growth will pressure investment returns, Fitch said.

However, the major Canadian pension plans should be able to manage these challenges, the report suggested.

“Canadian pension funds’ long-term investment horizons, captive inflows, relatively predictable outflows, asset diversification and strong liquidity remain supportive,” of their existing ratings, it said.

On the funding front, compared with their U.S. counterparts, funding risk is “less acute” for Canadian pension plans, Fitch said, as the Canadian plans are generally fully, or nearly fully, funded.

“Canadian pension plans also incorporate more conservative assumptions, with lower real discount rates than global peers, reducing funding risks,” it said.

Additionally, plans can reduce their funding risks by adjusting contribution rates or altering their designs, it noted.

Moreover, Fitch said that the investment portfolios of the Canadian pension funds are largely diversified, and that inflation will affect investment returns differently, depending on the asset class.

While traditional bonds tend to underperform amid inflation, Fitch said that Canadian pension funds have generally reduced their bond exposures in favour of private investments, including real assets, in recent years.

“Real estate and infrastructure investments can provide a partial hedge against inflation in sectors where income is indexed to inflation, such as residential, industrial and office properties, utility and social infrastructure and sustainable-energy projects, while inflation-linked bonds are fully indexed to inflation,” it noted.

Equities have “historically had mixed returns during periods of high inflation,” the report said.

“While some pension funds increasingly targeted technology investments in 2021, Fitch believes exposure remains modest,” it noted.

And, it said, “Rising interest rates could benefit Canadian pension funds’ credit portfolios, which largely comprise floating-rate investments.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.