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Canadian pension plans boosting alternatives, RBC survey shows

Canadian defined benefit plans increasingly are looking to increase allocations to alternatives while largely decreasing allocations to developed markets equity, according to a report from RBC Investor Services.

Of the 56 private and public plans surveyed, 48% plan on increasing allocations to alternatives in the next 12 months compared with just 2% that plan on decreasing alternatives. That number increases to 88% when isolating plans with at least C$1 billion (US$1.02 billion) in assets. Meanwhile, 43% of respondents plan on decreasing allocations to developed markets equity, with only 9% planning increases. Developed market bond allocations are somewhat split, with 20% planning on decreasing and 21%, increasing.

Forty-five percent plan on adding real estate within alternatives, followed by 34% citing infrastructure; 14%, private equity; and 7%, hedge funds. When it comes to barriers in investing more in alternatives, 18% said the cost is prohibitive, followed by lack of expertise at 17%, and risk issues, 15%.

“Canadian pension plans are getting increasingly more concerned with the persistent low interest rate environment and higher volatility in the stock markets,” said Andrew Tan, director of RBC Investor Services Risk & Analytics team, in the report on the firm's poll. “Alternative investments, especially the ones with better liability-cash flow matching characteristics are, as a result, growing in popularity with pension plans.”

Seventy-one percent of respondents cited the low interest rate environment as the biggest challenge facing pension plans in the next year, up from 27% in 2011. Aligning future liabilities with assets was second at 20%, down from 49% last year. Assets among the plans surveyed grew 12% from Jan. 1, 2010, to June 30, 2012, but liabilities increased 46% in the same period, according to the report.

Despite rising liabilities and volatility, 61% of respondents have no plans to discontinue pension plans. Twenty-seven percent have already closed DB plans to new hires, while 12% plan to do so in the next two to five years. Seventy percent of respondents had funding levels of less than 90%.

Of the 56 plans that were surveyed in the second quarter, 79% were private plans, 14% public plans and 7% other, such as university or multiemployer plans. Thirty-nine percent had assets of less than C$100 million, and 14% had assets greater than C$1 billion.