Despite World-Class Public Pension System, Worries Abound for Canada Retirement

(March 5, 2012)—Despite housing some of the world’s most sophisticated asset owners in its public pension sphere—the Canadian Pension Plan and Ontario Teachers’ Pension Plan among them—Canadian plan sponsors are concerned about immediate and long-term threats to retirement assets.

According to a study released this month by consulting firm Towers Watson, 65% of Canadian defined benefit (DB) plan sponsors “believe that Canada is experiencing a pension crisis that will be long-lasting and likely to worsen in the next 12 months.” This number is up from 56% in the 2011 iteration of the Pension Risk Survey, which asked 115 plan sponsor executives for their opinions on a variety of subjects.

Furthermore, the study says that 54% of DB sponsors are “currently planning or considering investment strategy changes, typically to de-risk their portfolios,” according to a release from the consulting firm. “In contrast to prior years when plan sponsors were more focused on seeking higher returns, 53% of 2012 respondents (compared to only 36% in last year’s survey) appear willing to accept lower returns in favour of reduced risk,” the release adds.

“Until a few years ago, plan sponsors remained caught in the mindset that de-risking meant giving up more return than they felt was worthwhile,” says David Service, Director of Towers Watson Investment Services, in the release. “Many plan sponsors did not take advantage of the de-risking opportunity that existed in 2006 and 2007 when their DB plans were close to fully funded. After another volatile year of market performance and declining funded status, sponsors now seem more inclined to focus on de-risking their DB plan—even if at the price of lower returns.”

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The release does not make clear whether the DB plan sponsors polled included the mega-plans that many think of when they consider Canadian retirement assets.

Other revelations from the survey include:

· With pending pension legislation, “a majority of respondents cit[ed] permanent extension of amortization periods (59%) and extensions to temporary funding relief (57%) as being within their top three priorities,” according to Towers Watson.

· Only 2% of current private sector DB plan sponsors expect to alter their plan structure towards a defined contribution plan in the next year.

(March 2, 2012) – The percentage of citizens in European nations aged 65 years or over is set to rise by up to 10 percentage points over the next quarter century, putting more pressure on pension systems, statistical data has shown.

Some of the European Union member states that run defined benefit pensions systems – funded and unfunded — are to be the worst hit by increasing longevity that will add to liabilities and make retirement provision more costly.

The highest increase is set to take place in Germany where 31% of citizens are projected to live beyond 65, compared to 21% in 2010, data from the Office for National Statistics in the United Kingdom revealed today.

The Netherlands is also projected to see as large an increase in percentage terms, from just over 15% of citizens aged 65 or over, to around 26% in 2035.

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Low birth-rates across the continent and improving elderly care has meant the average age of the population is to rise more quickly than ever before.

Last month, Gordon Sharp of the Actuarial Profession, said: “The last 20 years have seen unprecedented improvements in mortality rates, particularly for pensioners. We are able to say with confidence that the mortality improvement for 2011 has been well above the average.”

The United Kingdom is projected to see a smaller rise – from 17% to 23% – with Ireland keeping its position as one of the ‘youngest’ nations with a rise from just 11% to 19%. Longevity is one of the hardest risks to hedge out of a portfolio as it has few financial matching tools.

There has been an increase in the number of deals done with the life insurance industry, which needs to hedge out mortality risk, but limited capacity and a failure to create a stable market place in which to trade has meant the tool remains relatively underused.