Survey: Canadian Pensions Enjoy Improved Funding Status

(June 28, 2011) — A new survey by advisory firm RBC Dexia Investor Services shows pension plan funding is improving in Canada.

Nevertheless, the study revealed that pension fund sponsors remain concerned about market risks, particularly in regards to the threat of rising inflation and interest rates. “Inflation-sensitive assets, like infrastructure and real estate, are the hedges of choice,” Scott MacDonald of RBC Dexia Investor Services explained.

RBC’s study found that 85% of Canadian pensions reported that they are at least 80% funded as of April. Meanwhile, another 22% of pensions — a large majority of which were private sector companies as opposed to public sector or government plans — had funding between 96% and 100%. Six percent of the 108 plan sponsors surveyed said they have even have a funding surplus, exceeding 100% of liabilities.

The study noted that the issues of greatest concern among Canadian pensions are 1) aligning future liabilities with assets, and 2) the challenges associated with low returns. Additionally, the survey found 21% of plan sponsors aim to increase their holdings of alternative investments — the category most favored for a higher investment allocation. Roughly 50% of the largest pensions with more than $1 billion in assets are planning to boost their alternative-investment allocation. The focus on alternatives jibes with a recent study by Casey Quirk & Associates and eVestment Alliance of investment consultants in the US and Canada that showed that alternatives, emerging markets, and liability-driven investment (LDI) strategies will dominate search activity this year.

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RBC Dexia’s report included responses from 108 public and private pensions with assets ranging from C$100 million to more than C$1 billion.

The report echoes findings earlier this year from consulting firm Mercer, which found that Canadian pensions could see their funded status improve in 2011.

“If manager forecast of expected increase in interest rates and solid equity returns in 2011 occurs, plan sponsors should see improvement in their funded positions,” said Mark Fieldhouse, principal in Mercer’s investment consulting business in Canada, in a statement in January.

Mercer’s Fearless Forecast survey of investment fund managers found that Canadian funds will experience reduced shortfalls and a funded status more closely resembling levels prior to 2008’s market downturn. With pension funds’ costs measured using long bond yields, the 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. The consulting firm concluded that emerging market equity returns are expected to exceed each developed market in 2011, with a median expected return of 10%.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

Fueled by the entrepreneurial culture in the United States, asset owners have retained an appetite for innovation where specific principles are met, a new study shows.

(June 27, 2011) — While innovation is perceived as having had mixed results over the last decade, asset owners have retained an appetite for innovation, according to an annual, independent study by CREATE-Research, commissioned by Citi’s Global Transaction Services and Principal Global Investors.

“The global economy is still in a state of uncertainty and strong headwinds in the shape of financial regulation, scarcity of talent and revised client expectations are buffeting the industry,” Prof. Amin Rajan, CEO of CREATE-Research and the study’s author, said in a statement. “Against this backdrop, there has to be a clear line of sight between innovations and client needs. Asset owners will demand creative solutions which deliver tangible value. New products developed without such fundamentals and without clear client engagement will struggle to gain traction.”

Barbara McKenzie, Chief Operations Officer of Principal Global Investors, added: “The report explains that innovation must be redefined to match new client circumstances. As a multi-asset class, multi-boutique organization; Principal Global Investors is well positioned to address the growing demand from clients for more customized investment solutions. We have sophisticated sales and relationship management teams globally to spot trends and fill needs.”

According to the study, about 35 innovations saw significant adoption in the last 10 years. Specifically, 57% of respondents said that emerging markets equities delivered most value while leverage recorded the worst performance, according to 40% of respondents.

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Schemes also welcomed new asset allocation techniques, according to the study, including exchange-traded funds, liability-driven investment, and the use of derivatives to hedge out unrewarded risks. However, leverage, structured products, portable alpha, and currency funds were perceived as lacking intrinsic value.

A major cause of failed innovation, the study found was lack of client engagement. A total of 73% of pension funds surveyed are only rarely/occasionally engaged when asset managers innovate their financial products. Meanwhile, 88% of asset managers foresee further product innovations over the next three years.

The study — entitled Investment Innovators — surveyed more than 500 respondents from pension plans, asset managers, consultants, administrators and distributors from 30 countries with a combined assets under management of over $29 trillion.

Earlier this year, a report from the Pacific Investment Management Co. (PIMCO) criticized financial innovation. In a report titled “Devil’s Bargain” PIMCO head Bill Gross blamed financial innovation, such as securitization, for contributing to the financial crisis, urging investors to analyze other yields and assets. “Fifty years ago, the highest paid and most prestigious professions were that of a doctor or a 707 airline pilot who flew the ‘golden’ route from Los Angeles to Honolulu,” he wrote. “Today the yellow brick road begins on Wall Street or the City…the money is made from securitizing things instead of booting and rebuilding America. The tallest buildings in almost every major city are banks, with tens of thousands of people shuffling and trading paper for a living.”

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742