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.

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%.