TORONTO - Canadian pension plans returned just 1.5 per cent on their investments on average last year after a punishing fourth quarter, according to a report from Royal Bank's RBC Dexia Investor Services (TSX:RY).
Hurt by the high Canadian dollar's impact on foreign investments, pension funds lost half a per cent in the quarter ended Dec. 31, the financial services firm said.
Don McDougall of RBC Dexia said 2007 was a "tumultuous'' year where the Canadian dollar and surging energy prices hit new records while tightening global credit and recessionary pressures plagued the United States.
The loonie's "remarkable ascent against major currencies prevented most pension plans from benefiting from rising foreign stock markets.''
Until now, the pension funds had seen four consecutive years of double-digit annual returns.
"After four good years... one softer year isn't the end of the world,'' McDougall said in a phone interview.
He said that employees with pension plans shouldn't start to panic.
It's "their employers who are making that pension promise (who) would be concerned. The greater the rates of returns on their portfolios, the more they exceed their promise, the cheaper they are to fund for their employer,'' he said.
Canadian stock investments were the dominant asset class in 2007, earning 8.5 per cent over the year, but lagging the Toronto stock market's composite Index by 1.3 per cent.
McDougall also noted that gains on the market last year were focused primarily in a handful of stocks.
He said three of the top contributors made up more than half of the TSX's returns last year: Research In Motion Ltd. (TSX:RIM), up 127 per cent; Potash Corp. of Saskatchewan Inc. (TSX:POT), up 158 per cent; and Alcan Inc. up 72 per cent.
Canadian bonds earned only 3.4 per cent for the year, despite a solid 2.6 per cent rise in the final quarter. It was their worst annual performance since 1999.
The fallout on capital markets has been severe, said Janet Rabovsky, the investment practice director of Central Canada for Watson Wyatt consultancy.
"There's almost no asset class that hasn't been affected at least somewhat,'' she said.
"A lot of Canadian pension plans have a significant portion of their portfolio in global equities and other non-Canadian investments and many did not hedge.''
