Consultants and money managers are warning Canadian corporate defined benefit plans considering derisking that those who hesitate could be lost amid limited availability for long-term bonds and annuities.
“I agree that at a high level there's a concern about capacity,” said Gavin Benjamin, senior consulting actuary, Towers Watson Canada Inc., Toronto. “If it's doable for a pension plan, as more plans move in that direction, it will be more expensive. ... Annuities should also be looked at, but at the same high level, some of the same dynamics exist. Insurers would need similar volume of long-term bonds.”
Added Brent Simmons, senior managing director, defined benefit solutions, at Sun Life Financial, Toronto, “There's a lot of demand and capacity in Canada right now, but we definitely believe there's a first-move advantage for pension funds looking to go into LDI as a first step toward derisking.”
Capacity worries in liability-driven investing center around the availability and liquidity of its investment components, chiefly 30-year Canadian corporate bonds, Canadian real-return fixed income, private fixed income and commercial mortgages. Mr. Simmons said the market for 30-year corporates in Canada “is on the thin side,” and real-return and private fixed income, as well as commercial mortgages, also are in short supply in Canada. With annuities, the concern is that the C$2.5 billion ($1.9 billion) Canadian annuity market won't be enough to cover the derisking needs of corporate plans.
“All of those affect capacity,” Mr. Simmons said. “There are a lot of supply-and-demand factors. Capacity could increase, but right now, it's best that those who want to do LDI get in early.”