The financial crisis of 2008-09 gave Canadian defined-benefit pension plan managers pause, forcing them to reconsider their investment approach in order to address some of the challenges they expect to face in the coming decade, suggests new research from Pyramis Global Advisors LLC.

The Pyramis Global Defined Benefit research study, conducted every two years since 2002, surveyed chief investment officers, treasurers and executive directors at 466 corporate and public pension plans in 13 countries in North America and Europe. The plans cumulatively hold more than US$2 trillion in assets, which is about 12% of the global DB plan market. The Canadian part of the study looked at 79 plans, representing 40% — more than $100 million — of assets held in DB plans in this country.

Although there were some regional nuances, the overall theme for pension plan leaders these days is risk management, says Chris Pepper, director of corporate affairs with Fidelity Investments Canada ULC. (Pyramis is a Fidelity company.)

“Any time there’s a major upheaval in the markets,” says Pepper, “it causes you to take an inward look to make sure everything is prepared to withstand the shocks.”

Survey respondents from 13 countries cited the need for more downside protection (62%), improved risk management (54%), a better match of assets and liabilities (49%) and a need for more diversification (42%) to improve their plans.

The definition of “risk” and how best to manage it fluctuated depending on who’s being asked. In Canada, for instance, the solvency ratio was top-of-mind for DB plan leaders, with 23% naming it their No. 1 concern, followed by the low interest investment environment (18%) and volatility (14%).

Market volatility has hit Canadian DB plans hard in 2010, with plan leaders reporting a solvency ratio of 89.5%, down from 97.1% in the 2008 survey — conducted just before the market meltdown. In fact, Canadian DB plan leaders said they are most interested in creating downside protection in their investments, with 68% citing this as the top lesson learned over the past two years.

In the U.S., meanwhile, corporate DB plan leaders cited volatility of the plan’s funded status as their top concern, while those leading public DB plans were more concerned with the level of their funded status.

Conversely, in Britain and most of Europe, the top concern was a low investment return environment. There were exceptions: plan leaders in Finland, Ireland, Sweden, Norway and Denmark all cited risk management as their No. 1 concern.

In order to protect fund status, DB plans are looking to match assets and liabilities better, Pepper says. In fact, this was the top strategic challenge (39%) faced by the Canadian group, followed by controlling total plans costs (21%) and the difficulties of tracking aggregate portfolio risks (16%).

U.S. corporate DB plans are taking the same route. However, the report states, U.S. public and Northern European DB plans, which are presumably already weighted more toward fixed-income, intend to seek more diversification to reduce risk and enhance returns.

The survey found that Canadian DB plan sponsors are becoming more comfortable with sophisticated techniques and risk-management tools to control volatility. Diversifying into alternative assets, currency hedging and adopting liability-driven investing were cited as the top strategies.

The survey also looked at future expectations of asset allocation, which indicates a mixed bag of strategies. Although more than one-third (35%) of Canadian DB plan sponsors expected to shift their portfolios toward fixed-income in the coming decade, 22% felt that allocation will shift significantly to alternative asset classes such as real estate and hedge funds, while 19% expected to take a more global approach toward investments. A further 18% believed traditional asset-mix formulas (60% equities/40% fixed-income) will prevail, while only 6% said the market will experience a shift to absolute return strategies.

The solutions that the various respondents identified are consistent with the lessons they have learned, their top concerns and their definitions of volatility and risk, says Young Chin, chief investment officer with Pyramis. But, he cautions, there is no magic bullet when it comes to improving the solvency ratio and reducing the risk in pension plans: “The committees responsible for pension plan investments need to understand how global diversification, for example, can introduce new portfolio risks or how broadening allocations can affect liquidity risk management.”

Pyramis plans to conduct another global study in 2012. Although there may be a significant upturn in the market by then, Pepper says, he doesn’t expect the focus on risk management to go away. IE