GREENWICH, Conn. -- Canadian pension funds are increasing their use of derivatives, while fund trustees and investment committee members become more comfortable using them, a recent survey indicates.
Thirty-nine percent of the pension plan sponsors participating in the Greenwich Associates survey either use derivatives or allow their external managers to use them.
That is a big increase from the previous year's survey, when just 29% of those participating said they use derivatives.
Of the 39%, 19% are plan sponsors that use derivatives directly to implement investment decisions; 17% allow external managers to use derivatives at their discretion; and 4% allow external managers to use derivatives to invest internationally beyond the 20% limit. (Tax law limits pension funds to 20% of non-Canadian investment, but derivatives are allowed to give funds international exposure, provided the positions are collateralized with Canadian securities).
Thirty-two percent of survey participants do not use derivatives, with 13% of the total precluded from their use by plan documents, a small drop from the previous year's 16%.
While 20% of the respondents do not use derivatives because trustees or investment committee members are uncomfortable with them, that number is down from the previous year, when 31% cited that reason for not using derivatives.
Nine percent gave other answers to the question, while 20% didn't answer or were uncertain about derivatives policies.
Not surprisingly, usage is greater among larger pension funds. Of those Canadian sponsors with assets of more than C$1 billion, 62% reported the use of derivatives, while 12% said they don't use them.
Of plans with assets of C$501 million to C$1 billion, 45% use derivatives and 27% don't.
Twenty-two percent of plans with C$100 million to C$500 million to invest use derivatives, while 50% don't.
For funds of less than C$100 million 22% use derivatives, and 30% do not.
Public sector or provincial funds are the type most likely to use derivatives, with 55% of respondents reporting their use.
Only 5% of Canadian subsidiaries of U.S. corporations in the survey use derivatives.
Looking ahead, 41% of respondents anticipate they will use derivatives, while 25% expect to not expect to use them.
Greenwich's consultants attribute the growth in usage of derivatives by Canadian pension funds to increasing demand for international investments, and to a rising level of sophistication, exemplified in the growing comfort level with derivatives by fund trustees.
Greenwich surveyed 299 pension officials in May, June and July of 1997, choosing from a targeted universe of 410 pension funds.