Reported funding ratios at Canadian pensions funds declined to an average of just 90% in 2009 from 99% in 2008, according to new research from Greenwich Associates.

The firm reports that declining asset values and low interest rates, which increase the value of pension funds’ long-term liabilities, was responsible for the decline in funding ratios. Asset values dropped 17% year-over-year, which reduced the value of Canadian institutional portfolios to levels below those in 2006, it says.

Among the country’s largest pension funds, funding ratios declined to 82% from 94%, Greenwich notes. Corporate funds saw their reported funding levels decline from 102% in 2008 to 89% in 2009, while funding levels for public sector/provincial plans fell to 90% from 95%, it adds.

The firm reports that Canadian pension funds adopted an increasingly conservative investment strategy amid the turbulent markets in 2008 and 2009.

“A combination of declining equity valuations and proactive shifts in portfolio asset mixes brought down institutional allocations to domestic equity to 16.7% of total assets in 2009 from 18.7% in 2008,” it says. “At the same time, fixed-income allocations increased to 36.0% of assets from 30.8%.”

Canadian public sector funds took a slightly more aggressive approach than other institutions, Greenwich found, as those funds had lower allocations to fixed income than corporate funds and higher allocations to alternatives. Public sector/provincial funds had allocations of 5.8% of total assets to private equity in 2009, compared to allocations of only 0.7% among Canadian corporate funds, it says. Public/provincial funds also had higher allocations to real estate, hedge funds and infrastructure.

For the next 12 months, 40% of Canadian plan sponsors said they are planning to make substantive changes in their asset mixes, up from 31% the prior year. “If implemented, the changes planned by these institutions will result in additional reductions to domestic equity allocations,” it notes, as 17% of Canadian funds plan to significantly reduce allocations to active Canadian stocks, and only 5% plan to increase them. Much of the cash moved out of domestic equities will likely be invested in alternative asset classes, Greenwich adds.

Finally, Greenwich says that funds’ average expectations for fixed income returns are reported to be 4.7%, and expected returns on Canadian equities are 7.8%, expectations for U.S. equities are 7.6%, and for EAFE/international equities 8.2%. Only in alternative asset classes did Canadian plan sponsors report significant movement in return expectations from year-to-year, with expectations for private equity dropping to 10.0% from 10.7%, real estate expectations falling to 7.1% from 7.8% and expected returns on hedge funds declining to an annual 7.2% from 7.8%, it says.

IE