GREENWICH, Conn. — Liability-driven investing, portable alpha and absolute-return strategies are becoming the weapons of choice for Canadian plan sponsors eager to counter the specter of underfunding.
A new study by Greenwich Associates found that among nearly 40% of Canadian plan sponsors who cite underfunding as a pressing concern, 30% have implemented portable alpha strategies, while slightly less than 30% have adopted LDI solutions and — separately — absolute return strategies.
Aside from Japanese investors’ appetite for absolute-return, “The percent of (Canadian) plan sponsors that are looking to new types of strategies such as LDI, such as portable alpha, such as absolute-return strategies is higher than any of the comparable numbers in any of the investment markets that we look at in the world,” said Lea Hansen, a consultant at Greenwich Associates and a co-author of the study.
This focus on tackling underfunding comes despite the fact that Canadian plans are relatively healthy, according to Greenwich, with an average funded status of 97%. The average corporate plan in Canada was 99% funded in 2006 and public plans were 100% funded, but the overall average funded status was dragged down by Canadian subsidiaries of U.S. companies, which were 92% funded on average.
Last year, combined assets of all Canadian retirement plans surpassed the C$1 trillion (US$852 billion) mark for the first time, rising 17.6% for the year on strong domestic equity and commodities returns. Canadian plans had a total of C$1.02 trillion in assets as of Dec. 31, compared with C$867.3 billion a year earlier.
One section of alternatives where Canada continues to lag behind U.S. funds is hedge funds. Only 15% of Canadians reported using hedge funds vs. 36% in the U.S.
Robust equity market returns may be one reason why hedge fund usage in Canada continues to lag behind its usage in the U.S. counterparts, Ms. Hansen said.
“The hedge fund expected rate of return for the next five years is actually down from the year before and the expected returns are lower than Canadian equities, U.S. equities and every other asset class other than fixed income. So plan sponsors aren’t really looking to hedge funds for the huge rates of return, which perhaps is a good thing because they are looking at hedge funds for other attributes such as diversification and risk reduction,” she noted.
The report found that in 2006 plan sponsors expected a 7% return from hedge funds over the next five years, down from the 7.4% they expected in 2005.
However, in terms of allocation the gap between the U.S. and Canada is less pronounced, with Canadian plans allocating 1.5% of total assets to hedge funds, compared with 2% for U.S. plans.
In terms of defined contribution plans, Canadian plan sponsors are increasing their take-up rates, although not in the same rate as U.S. funds, Ms. Hansen said. In 2006, 20% of corporate plans said they expect to add a DC plan, compared with 13% in 2005.
The study was based on interviews with Canadian fund professionals at 246 pension funds between August and September.
