There’s plenty of reason to be optimistic, but the reality is that defined contribution (DC) pension plans are in for a few tough years, Aron Gampel, Scotiabank’s chief economist, said Wednesday, at the third annual DC Investment Forum in Toronto.
Canada is well positioned to emerge without too many deep wounds from the global financial crisis, but by no means are investors out of the woods.
“We’re probably in a period of lower returns over a prolonged period of time,” Gampel said.
Over the past few decades, the average rate of return on the S&P and TSX has been just under 8%. But over the next few years, Gampel expects average returns to be around 5.5%.
It’s lower than the expected figures for Europe (6.5%), but higher than the U.S. (4.5%).
The primary reason is the low nominal growth rate, predicted to be about 4.5% for the next few years, Gampel said.
Add it all up and managers of DC pension plans could be struggling with low yields for longer than hoped.
But Gampel remains optimistic that the growth rate will eventually gain steam.
Canada has one of the most diversified economies in the world, and all governments have taken steps to progressively reduce the tax burden.
Unfortunately, the same can’t be said of the U.S., which still teeters on the brink of another housing crisis. If there’s a double-dip recession, Canada won’t be spared.
“Of course, we’re going to be in the slow lane because of the U.S. But we’ll be able to get out of that,” Gampel said.
He wants to see Canada improve its trade relationship with the developing world, saying those economies show the most growth potential.
“We have to continue to diversify our trade performance, in order to put more goods into countries that are growing.”
Monetary and trade policies are going to play significant roles in the economic recovery, since it appears that consumer spending is likely to remain low for years.
“That is reflected in surveys. People don’t feel as optimistic as they probably should more than a year into the recovery period.”