Pensions turn to alternative investments to boost returns, cut volatility

Real estate and infrastructure are preferred choices for DB funds looking to combat lagging funding levels

By: IE Staff
September 20, 2012 September 20, 2012
08:50

A new poll suggests Canadian defined benefit (DB) plan sponsors are looking to alternative investments as means to cut volatility and boost returns.

RBC Investor Services said Thursday that 48% of DB plan sponsors plan to increase their allocation to alternative investments, which can include real estate, infrastructure assets and private investments, as they seek more long-term returns less correlated to public equity markets.

RBC Investor Services’ latest survey of Canadian pension plan sponsors also revealed that 70% had funding levels lower than 90%.

In this protracted low interest-rate environment, alternative investments hold even greater allure for the largest DB plans 88% of respondents with over $1 billion in assets indicating they planned to increase their allocation.

“Canadian pension plans are increasingly looking to the alternatives asset class for long-term assets that are better matched to their liabilities, and less tied to the swings of the stock markets,” says Scott MacDonald, head, pensions, Insurance, and Sovereign Wealth Strategy for RBC Investor Services.

“With many governments seeking investors to renew ailing infrastructures, there are deals to be made and pension plans are looking to gain exposure to these assets in their portfolios.”

For respondents already holding alternative assets or those looking to invest in them, real estate is the preferred choice — 45% plan to add these assets and 34% plan to invest in infrastructure assets.

This trend is validated by experts at Aon Hewitt, a global leader in human resource solutions. Mark Chow, Associate Partner, Investment Consulting & Investment Manager Research, Aon Hewitt commented: “It’s not a surprise that Canadian plans are investing more in alternatives, primarily illiquid assets such as real estate and infrastructure. Plan sponsors are looking for asset classes to help build better, more efficient, portfolios with the risk budgets allocated to them.”

Respondents were also asked to comment on future expectations concerning the viability of maintaining their defined benefit pension plan structures. A strong majority, 61%, have no plans to discontinue offering DB plans. However, 39% of respondents have either already closed off their DB plans to new members and opened DC plans (27%), or they plan to do so within the next two to five years (12%).

The survey results represent the aggregate responses of 56 Canadian public and private pension plans with plan assets ranging from less than $100 million to over $1 billion.