Canadian Pension Plans Delivered Muted Returns in Q4 2025 Amid a Shifting Geopolitical Landscape
Canadian pension plans continued to show resiliency and strength through another volatile period in the fourth quarter of 2025, carving out a modest median return of 0.2% for the quarter and generating a return of 4.4% for the year, according to the Northern Trust Canada Universe.
Similar to the beginning of 2025, the fourth quarter started with market volatility caused by geopolitical tensions, trade policy friction, and economic uncertainty, compounded by a U.S government shutdown that lasted a record 43 days. Much of the data released during the quarter showed most major economies held up reasonably well in the face of a challenging environment. The U.S. Federal Reserve (Fed) cut its overnight interest rate twice during the quarter as its labour market showed signs of cooling, while the Bank of Canada (BoC) cut its benchmark rate in October and maintained the rate at its December meeting, acknowledging some improvement in the labour market and employment activity. The outlook improved as the U.S. government shutdown resolved, the U.S. and China agreed to a temporary trade truce, and tariff-escalation rhetoric reduced to a simmer.
Equity markets navigated through events and generated positive performance, led by Canada, for the quarter and the year. Other major equity indices closed the year producing attractive double-digit returns. Canadian bonds witnessed a modest decline for the quarter as the yield curve steepened but posted a positive return for the 12-month period.
"This past year, the markets have endured heightened levels of volatility as trade policy experienced dramatic shifts around the world. As global economies adapt and pension plans navigate this new era, diversification continues to be a vital tool utilized by plan sponsors, enabling investment returns to remain resilient throughout these uncertain times," said Katie Pries, president of Northern Trust Canada.
The Northern Trust Canada universe tracks the performance of Canadian institutional defined benefit plans that subscribe to performance measurement services as part of Northern Trust's asset service offerings.
Global equity markets shrugged off much of the headline news in the fourth quarter, advancing higher supported by strong corporate earnings. Canadian interest rates nudged higher during the period, resulting in a modest decline for Canadian bonds. Gold witnessed a noteworthy move early in the quarter as it surpassed USD $4000 per troy ounce, demonstrating a significant flight to safety as the U.S. government shutdown dominated the news.
- Canadian Equities, as measured by the S&P/TSX Composite Index, advanced 6.2% for the quarter and a solid 31.7% for the year. The Materials, Consumer Discretionary and Financials sectors led performance for the quarter with attractive double-digit returns while Real Estate was the weakest segment. All sectors were positive for the full year with the Materials sector being the top performer, returning a huge 100.6%, while the Health Care sector finished in last place.
- U.S. Equities, as measured by the S&P 500 Index, posted a 1.1% gain in CAD for the quarter and 12.4% in CAD for the year. The Health Care and Communication Services sectors posted the strongest gains for the quarter, while Real Estate observed the weakest results. Communication Services and Information Technology outperformed all segments for the year, with Real Estate witnessing the largest decline.
- International developed markets, as measured by the MSCI EAFE Index, gained 3.4% in CAD for the quarter and returned an attractive 25.7% in CAD for the year. The majority of sectors posted positive returns for the quarter with Utilities leading the pack, while Communications Services noted the weakest underperformance. All sectors produced double-digit gains for the year with the exception of Consumer Discretionary sector with a single digit positive return. Financials and Utilities were the strongest outperformers for the 12-month period.
- The MSCI Emerging Markets Index generated 3.2% in CAD for the quarter and advanced 28.1% in CAD for the year. Information Technology led with a strong double-digit return for the quarter, while Consumer Discretionary was the weakest performing with a double-digit decline. All segments witnessed positive returns for the year led by Materials and Information Technology, while Real Estate and Consumer Staples lagged behind all sectors.
The Canadian economy demonstrated resilience amidst uncertainty and ongoing volatility during the fourth quarter. While official Q4 GDP figures have not yet been released, earlier data showed that economic growth had rebounded in Q3, providing some momentum heading into the final months of the year. Labour market indicators also strengthened during the quarter, with the unemployment rate trending lower by period end. The Bank of Canada (BoC) lowered its overnight interest rate early in the quarter by 25 basis points and later made the decision to hold rates steady at 2.25% at its December meeting. The Central Bank views its current policy rate to be "at about the right level" to keep inflation in check and manage the current challenges faced by the economy, hinting that rates may not be cut further for the foreseeable future.
The U.S. economy showed signs of strength despite the U.S. government shutdown and a softening labour market that occurred during the quarter. Inflation data remained steady throughout the period as the economy continued to expand. The Federal Reserve remained accommodative, cutting its key interest rate by 25 basis points twice bringing the overnight rate to a range of 3.5 – 3.75%. Although growth and inflation forecasts improved, Fed Chairman Jay Powell noted that both areas face risks and reiterated that the bank was "well positioned to wait and see how the economy evolves."
International markets performed reasonably well in the final quarter of 2025. The European Central Bank (ECB) kept its deposit rate unchanged at 2%, as its inflation rate remained close to the Bank's target. The Bank of England (BoE) in its final meeting of the year, cut its benchmark rate by a quarter point to 3.75% in the face of weak economic data, a softening labour market and a decline in inflation. The Bank of Japan (BoJ) exercised a tightening stance by increasing interest rates by 25 basis points to 0.75%, the highest in 30 years.
Emerging markets observed a strong quarter despite uncertainty around the globe. The People's Bank of China (PBoC) held its one-and five-year loan prime rates (LPR) unchanged. Supporting this decision was weak economic data and an ongoing slump in its property sector. The Central Bank of Brazil held its interest rate steady at 15% in hopes that inflation would remain on a steady path. The Reserve Bank of India (RBI) cut its key repo rate by 25 basis points to 5.25% given a softer inflation outlook.
The Canadian Fixed Income market, as measured by the FTSE Canada Universe Bond Index, reported a modest decline for the quarter. Short term bonds produced a slight gain, while both mid and long-term bonds declined over the period. Corporate bonds advanced modestly over the three month period, while both Federal and Provincial bonds observed a decline.
About Northern Trust
Northern Trust Corporation (NASDAQ:NTRS) is a leading provider of wealth management, asset servicing, asset management and banking services to corporations, institutions, affluent families and individuals. Founded in Chicago in 1889, Northern Trust has a global presence with offices in 24 U.S. states and Washington, D.C., and across 22 locations in Canada, Europe, the Middle East and the Asia-Pacific region. As of December 31, 2025, Northern Trust had assets under custody/administration of US$18.7 trillion, and assets under management of US$1.8 trillion. For more than 135 years, Northern Trust has earned distinction as an industry leader for exceptional service, financial expertise, integrity and innovation. Visit us on northerntrust.com. Follow us on Instagram @northerntrustcompany or Northern Trust on LinkedIn.
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