Week of August 4, 2025
Dec Mullarkey, CFA, Managing Director, Investment Strategy and Asset Allocation
After delays and last minute negotiations, U.S. tariffs are in effect for most goods entering the country. The effective tariff rate is over 18% and likely to climb as ongoing negotiations and sectoral tariffs have yet to be ironed out. Surprisingly, most countries have not retaliated. Many have appeared to conclude that forcing their own businesses and households to pay more for U.S. imports is essentially a tax that could harm their growth.
Meanwhile, U.S. large cap equity markets hit new highs, buoyed by strong earnings and continued AI enthusiasm. Markets seem to either assume that tariffs will take a bite out of growth and force the White House to relent or that the courts will rule that the President does not have the power to impose sweeping tariffs.
Certainly U.S. growth may come under pressure. The most recent unemployment report was weak. But it also significantly revised down the estimated numbers of jobs added in prior months. Meanwhile, the most recent inflation report showed it ticking up. Wall Street analysts are also advising that investors should brace for a correction.
The next several months will bring more data and a possible court decision. The U.S. Federal Reserve will also meet three times by year end to decide rate cuts. Its actions may also offset any emerging weakness. For now, equity markets seem optimistic that any growth deterioration will be held in check.
Sources: Bloomberg, Yale Budget Lab, Financial Times, 2025.
Ashwin Gopwani, FSA, FCIA, CFA, CAIA, Managing Director, Head of Retirement Solutions
Some surprising news emerged this quarter affecting retirement plan investors, which might require Canadian pension plans to re-assess their portfolio allocations. Every quarter, the Committee on Pension Plan Financial Reporting (PPFRC) of the Canadian Institute of Actuaries (CIA) releases guidance on assumptions to be used for valuing liabilities assumed to be settled via annuity purchase in a solvency valuation. Colloquially, this is referred to as the “annuity proxy,” which is determined based on a quarterly survey of insurers and bona fide live quotes received during the quarter. Short of speaking directly with insurers, this quarterly release is the best pulse that Canadian pension plans have to understand changes in the cost of purchasing an annuity. This number is of great interest to plans either tracking their solvency liabilities or those intending to purchase an annuity in the near future.
The annuity proxy is expressed as a spread above a reference Government of Canada risk-free rate. Various factors impact the spread, including competition within the annuity market, the spread on assets available to insurers to back annuities, changes in the shape of the yield curve and changing longevity views among insurers.
This quarter, pension plans received a surprise – the annuity proxy for June 29, 2025, decreased by 20 basis points (bps) for plans without cost-of-living adjustments linked to the Consumer Price Index (i.e., “non-indexed plans”) and increased by 30 bps for plans with cost-of-living adjustments linked to CPI (“indexed plans”). While the decrease in the proxy for non-indexed plans could be partially anticipated due to decreases in corporate and provincial spreads and changes in the shape of the yield curve over the quarter, the 30-bp increase for indexed plans was likely a surprise. The lack of inflation-linked fixed income securities that provide a spread has typically resulted in a very stable annuity proxy for indexed plans, with no change for years – the last such change occurred on December 31, 2023. The increase this quarter likely reflects increased competition among insurers in the index annuity market, the availability of attractive inflation-linked fixed income assets or new asset strategies from insurers to hedge these liabilities.
This is the first time since the launch of the proxy that the indexed annuity proxy is positive, meaning that plans might need to seek a spread on their assets above the risk free rate in order to keep up with indexed solvency liability rates. This might be achieved either through an allocation to return-seeking assets or nominal fixed income, or by adding a synthetic spread through the use of derivatives.
Source: Canadian Institute of Actuaries, 2025.
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