(November 8, 2013) – Risk levels in Canadian pension funds are still “too high” and de-risking exercises are only appearing “gradually”, according to Aon Hewitt’s Global Pension Risk Survey.
An 88% median solvency rate was recorded for Canada’s defined benefit plans as of September 2013. The deficits are largely due to the ongoing impact of the financial crisis and a decline in long-term interest rates, the report said.
The ongoing solvency problems has led to a greater interest in understanding the pension funds’ risks, heightening interest in de-risking plans.
Despite this only 33% of Canadian plans reduced their equity holdings in the past year, with another 30% planning to continue the trend to divest from equities in the year ahead.
In addition, 30% are planning to increase their holdings to alternative assets.
“Successful plan management can no longer be considered a passive exercise,” said Will da Silva, senior partner of Canadian retirement consulting at Aon Hewitt.
“It requires careful attention to long-term funding and investment strategy and a disciplined focus on adapting the strategy to take advantage of opportunities that may arise.”
So severe are the concerns around pension funds’ solvency in Canada that 46% of funds took advantage of funding relief measures offered by the government, and another 30% plan to see relief in 2014.
The funding relief measures allow for the elimination of debt payments relating to solvency deficiencies, extension of the solvency debt payment period up to a maximum of 10 years, and the use of a smoothed asset value for solvency valuations.
Canadian pension funds problems aren’t solely caused by their risk management strategies however: they have been hampered not just by the low-yielding environment, but also by a change to accounting standards from International Accounting Standards to the International GAAP standard, Aon Hewitt noted.
More recent changes to the accounting standards meant companies were no longer able to recognise assets outperforming the corporate bond discount rate in their income statement—a further point of “pain” for affected plan sponsors.
Action plans are being put in place however, Aon Hewitt said. Among its findings were that 37% of funds said they considered low-risk targets part of their long-term strategy, 40% were interested in hedging risk related to interest rates, and 22% were planning to increase allocation to long bonds to better match their plan’s liabilities.
Sixty percent of surveyed DB plans said they were also closely observing longevity risk in their portfolios and 28% said they were interested in hedging that risk.
Aon Hewitt said it also hoped the growing focus on risk could be the “catalyst” for the dramatic growth witnessed in monitoring practice, “as we see years of discussion finally gel into actionable strategy”.
“It is apparent that sponsors are not only mindful of the need to plan, but also that plans are focused on achieving established goals,” the report said.
To this effect, 78% of defined benefit plan sponsors are now monitoring pension plan assets and liabilities on a regular basis, 50% measure progress against long term objectives, and 84% of plan sponsors claim to have a long-term plan in place.
Aon Hewitt surveyed 139 Canadian pensions with more $250 billion in total assets. The full report can be found here.
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