Canadian pension funds well placed to weather incoming storms, says Fitch

The ratings firm says that the credit profiles and outlooks for funds are robust enough to withstand challenges

Canadian pension funds well placed to weather incoming storms, says Fitch

Challenging times ahead should not be a major concern for those relying on their investments in Canada’s pension funds according to Fitch.

The ratings firm says that the credit profiles of the funds show they can withstand the challenging investment landscape over the near term but warns that investment and funding risks remain elevated.

Canada’s pension funds rated by Fitch enjoy AAA ratings and stable outlooks thanks to “strong asset overcollateralization and liquidity, creditor priority of debtholders to pensioners, captive inflows, solid long-term investment track records, relatively stable interest and dividend income to service debt and fund pension obligations, strong corporate governance, and a supportive regulatory framework.” 

The strong asset coverage provides a buffer for funds to mitigate choppy waters in the near term and their focus on long term investments mean they can work through troubled investments.

Low or no growth

If there was a prolonged period of low or now growth, Fitch says this would be more challenging for Canadian pension funds while interest rates also remain elevated.

However, payments to members are highly predictable and most are funded by the contributions of members and employers, reducing the risk.

Fitch says that the top seven Canadian pension funds had approximately C$2.0 trillion of net assets as of Dec. 31, 2022, up 4% year-over-year, driven by contributions, distributions, and investment returns.

The funds’ investment returns vary from fund to fund but “higher valuations and extended investment holding periods, given lower monetization activity, have led to several pension funds being fully allocated or overallocated to private equity, with positions expected to be trimmed in the year ahead.”

Real assets

The report also notes that many Canadian pension funds have boosted their holdings of real assets in recent years, although exposure to retail and traditional office is modest.

“Real assets provide partial capital protection against long-term inflation due to rent indexation or lease increase clauses for infrastructure and real estate sectors with strong demand characteristics,” the report states.