Canadian defined benefit plans are gravitating toward greater allocations to alternative investments and see them as an effective way to derisk, according to a survey from RBC Investor & Treasury Services.
The annual survey of 122 Canadian DB plans, conducted in November, also shows plan executives' overriding concern is the low-interest-rate environment, as the percentage of plans that are fully funded has dropped.
RBC's survey shows 73% of Canadian DB plans overall currently hold alternatives or expect to add them, up from 71% in 2019, and 96% of larger plans (with more than $5 billion in assets) hold them or expect to do so, compared to 90% in 2019.
When asked what the most effective derisking strategy is, 26% of respondents answered liability-driven investments, down from 30% in 2019. The choice of "use of alternative investments" was new to the 2020 survey, and 23% of respondents said that was their most effective derisking strategy.
Derisking is of significant importance for DB plans due to the low interest rate environment that has negatively affected Canadian plans' funding ratios, the report said. The percentage of plans that were 100% of more funded was 50% in the 2020 survey, down from 66% the previous year.
When asked what their top near-term challenge is, 26% of respondents said low interest rates, up from 20% in 2019.
The Bank of Canada in March 2020 lowered its policy interest rate to 0.25% from 1.75% in response to the economic impact of the COVID-19 pandemic.
"While confidence remains high, some of the main short-term challenges across all plans are the low-interest-rate environment, economic and geopolitical uncertainty, coupled with market volatility," said Niki Zaphiratos, managing director and head of asset owners, global client coverage Canada, at RBC Investor & Treasury Services, in a news release Wednesday about the survey results.
The confidence of Canadian DB plans received a score of 4/5 in the 2020 survey, compared to 4.4/5 in 2019.
The full report is available on the RBC Investor & Treasury Services website.
