Survey: Canadian DB Pensions to Suffer Continued Funding Shortfall

(January 20, 2011) — Research by Towers Watson has shown that Canada’s top portfolio managers are expecting interest rates to stay below the historical trend, suggesting there will be a further delay before many Canadian defined benefit (DB) pension plans become fully funded.

According to the study, respondents forecasted modest growth, low inflation and low interest rates to continue in the short term, with Canadian real GDP growth at between 2% and 2.5% this year and inflation remaining below 2%.

The poll showed the majority of fund managers interviewed expect emerging markets, such as China and India, to bring in strong results, with emerging markets expected to be a key driver of economic activity. “There is a general consensus that economic growth in the emerging markets will outperform that of the advanced economies,” Janet Rabovsky, a senior consultant in Towers Watson’s Investment practice, said in a statement. “As a result, the vast majority of the money managers we surveyed expect emerging market equities to be one of their strongest-performing asset categories, especially over the long term.”

Additionally, the survey showed smaller plans are shying away from equities into fixed income, while plans with more than $1 billion dollars in assets are shifting away from both traditional equities and fixed income into alternatives such as infrastructure, hedge funds and real estate.

The results of Towers Watson’s 30th Annual Canadian Survey of Economic Expectations were compiled to provide a consensus opinion on Canada’s economic prospects over the short (2011), medium (2012-2015) and long terms (2016-2025).

The Towers Watson poll contrasts with earlier study by consultant firm Mercer. In Mercer’s latest Fearless Forecast survey, investment managers predicted that Canadian pensions will experience reduced shortfalls, with funds seeing their funded status actually improving and moving closer to the levels they hit before the market downturn in 2008.

With pension funds’ costs measured using long bond yields, Mercer’s study predicted a 0.35% increase in long bond yields in 2011, which would result in a 5% decrease in the liability facing funds to provide benefits to members. Furthermore, the study estimated that Canadian equity markets will climb by 8.5% while US markets will grow by 9% and foreign markets will return approximately 7.5% in 2011. Similar to Towers Watson’s findings, Mercer concluded that emerging market equity returns are expected to exceed each developed market in 2011, with a median expected return of 10%.