TORONTO — Canadian defined benefit pension plans, much like their U.S. brethren, are facing a three-headed monster of low return expectations, a low interest rate environment and climbing liabilities, according to a new report from JPMorgan Investment Management.
In response, pension executives in Canada are considering or already are engaging in asset-liability management, portable alpha strategies and hedge funds, according to the report, "Evolving Trends of Canadian Pension Plans."
Of the 240 largest pension plans in Canada representing some US$240 billion, 104 responded to a JPMorgan survey — 52% were corporate pension plans, 27% public plans, 6% union plans, and 15% were classified as "other." Additionally, 40% of the respondents to the survey said their plans were less then 95% funded.
Meeting assumed rates of return was the biggest worry for 41% of the respondents, according to the survey. For the next year, the average assumed rate of return is 7.7% among the respondents, while the average discount rate is 5.9%.
Additionally, 16% said declining Canadian interest rates is the biggest concern, because liability discount rates are based on current and past interest rates. The average yield on the Canadian yield curve was 4.5% as of Dec. 31. The Central Bank of Canada's benchmark interest rate is currently 3.5%. Fifteen percent said market volatility is the biggest concern, while 12% said the main concern was the funded status of their plans.
In other areas, 78% of the respondents said they plan to revisit their asset allocation within a year; 76% will focus on alpha generation; 56% will look to reduce volatility in their portfolios; 51% will look to manage assets relative to liabilities; and 41% said they will look at portfolios that separate alpha and beta.