Canadian pension plans are faring well in volatile markets, according to new research from Fidelity Investments’ institutional asset manager Pyramis Global Advisors.
The second annual Canadian Defined Benefit Research from Pyramis Global Advisors surveyed corporate and public defined benefit (DB) plan sponsors from across Canada on their current investing strategies, their plans for the future, and how they are reacting to the changing investment landscape.
It found that the plans have benefited from the strong Canadian equity markets with five-year average returns of 11.7%, as of Dec. 31, 2007.
Plan sponsors also have very strong funding ratios with the average funding status at 102.7%, and 67% of plans report that their plans are funded at more than 100%.
Plans in Eastern Canada report average funding levels below the national average, at 99.4%. In comparison, plans in Central Canada fared the best, reporting funding levels of 106.4%–an interesting finding given the deepening economic slump in Central Canada. Western Canadian plans were also above the national average with funding levels at 101.6%.
Despite the performance, the research also showed that plan sponsors are growing more concerned about how they will continue to generate returns in today’s low return environment and volatile markets.
“Many Canadian pension plan sponsors are at a crossroads on where they are going with their plans. While they have benefited from strong Canadian equity markets over the past few years, they are now faced with challenges and tough choices,” said Peter Chiappinelli, senior vp of asset allocation strategies at Pyramis Global Advisors, in a statement.
“Plan sponsors are debating a number of major decisions from how much Canadian equity to have in their plan, to if they should utilize alternative investments and finally how they will manage risk in these volatile markets.”
The positive news is that the vast majority (97%) of existing corporate DB pension plans in Canada are committed to maintaining their defined benefits program for their current and future employees. Most plan sponsors believe in the ability of DB plans to provide an adequate level of retirement savings for their employees, and believe that DB plans offer superior recruitment and retention for today’s workforce.
When asked for their top concerns, nearly a quarter of plan sponsors name the low return environment as number one. Risk management is another major area of focus along with market volatility, as plan sponsors look to maintain their positions in the face of choppy markets.
There was a divergence in concerns of corporate pension plan sponsors versus public plan sponsors. While low returns top the list for corporate plan sponsors along with their funded status, risk management is top of mind for public plans. Since they tend to be larger than corporate plans, public funds are more able to access more alpha-generating asset classes and strategies such as infrastructure and private equity, but they still need to ensure they can manage the new risks associated with them.
Both corporate and public plan sponsors are paying close attention to pension reform. Many plan sponsors continue to view the regulatory environment as a major barrier to the health of their plans, especially as they grapple with poor market returns and other risks looming on the horizon.
Corporate and public plan sponsors diverge on the pension reforms they would most like to see implemented. One-third of corporate plan sponsors want clear title on plan surpluses, while a further 22% want to extend the solvency deficit amortization periods.
Among public plans, 28% are most interested in being able to raise or remove limits on accumulate surpluses and 24% want restrictions on investments to be loosened. Harmonization of legislation appears to be less of a concern, with only 12% of all plans indicating that the patchwork of rules across the provinces is a major area needing improvement.
Pyramis’ research also shows that Canadian pension plan sponsors are interested in using alternative investments to generate higher returns, but are facing challenges in utilizing these solutions.
“Despite the positive role alternatives can play in helping plans diversify their returns and reduce risk, Canadian plans have not adopted alternative investments as much as their U.S. counterparts,” said Chiappinelli. “Many Canadian plan sponsors report that their investment guidelines do not allow the use of alternative investments or shorting. As well, many plan sponsors indicate that they need more education on alternative investments.”
@page_break@Extension strategies (commonly known as 130/30) continue to be a main area of focus for Canadian plan sponsors, with 46% of public plans and 26% of corporate currently using or considering using these strategies. But research shows plan sponsors run into challenges implementing these strategies.
A common concern voiced by many plan sponsors regarding using alternatives is that they believe risk management is more challenging than with traditional asset classes.
“A big focus for plan sponsors going forward is going to be risk: taking it on, measuring it and managing it. A key finding of our research is that a large majority of plan sponsors don’t think that today’s risk tools are adequate when it comes to dealing with alternative investment strategies,” added Chiappinelli. “Clearly there’s room for another rethink of the role risk management plays in today’s pension portfolios.”
Pension plans worried about returns in volatile markets
Study finds plans are on solid ground now, but are seeking ways to generate future returns
- By: Megan Harman
- October 22, 2008 October 22, 2008
- 10:35