Canadian pension plans have modified their risk management and diversification techniques in response to the financial crisis, and expect to adjust their asset allocation strategies significantly in the decade ahead, according to new research by Pyramis Global Advisors.

As a continuation of a research series that has tracked institutional investor views and attitudes since 2002, the Pyramis Global Defined Benefit research study surveyed chief investment officers, treasurers and executive directors at 466 corporate and public pension plans in the U.S., Canada, and Europe. The plans cumulatively hold more than US$2 trillion in assets – an estimated 12% of the global defined benefit plan market.

The research shows that pension plans are facing a slew of new concerns since the financial crisis of 2008 and the investment market volatility that followed. Major concerns include solvency ratios, which according to the research, have fallen to 89.5% from 97.1% in 2008, volatility and the low interest rate environment.

The top lessons learned from the period of turmoil, according to the plan sponsors, include the need for more downside protection, the ability to better match assets and liabilities, and improved risk management techniques. Respondents said they’ve also realized the importance of enhancing diversification and streamlining strategic decision-making.

“Pension plan executives gained a new appreciation for risk management during the recent financial crisis,” said Young Chin, chief investment officer at Pyramis Global Advisors, which is a subsidiary of Fidelity Investments Canada ULC. “Based on this survey and our own conversations with clients, there is a great deal of concern in the market today about how best to assess risk and address it. As a result of the many lessons learned, plans are implementing new investment strategies and risk measures designed to meet their long-term goals.”

Indeed, the research showed that Canadian plan sponsors are employing more sophisticated techniques and risk management tools to control plan volatility. For example, they are using currency hedging, adopting liability-driven investing, and diversifying into alternative asset classes. Sponsors also expressed intentions to further diversify their portfolios into fixed income assets.

In the decade ahead, pension plan sponsors appear set to further adjust their investing approaches. Specifically, 35% of Canadian respondents expect portfolio allocations to significantly shift to fixed income and immunized strategies, while 22% expect asset allocation to shift significantly to alternative asset classes. Another 19% said they expect that allocations will become more global, while an almost equal percentage believe that traditional asset mixes will prevail.

IE