Canadian DB Plan Sponsors at a Crossroads

Pyramis Global Advisors’ second annual Canadian Defined Benefit Research surveyed corporate and public defined benefit (DB) plan sponsors on their current investing strategies, plans for the future and reactions to the changing investment landscape.

According to Chiappinelli, there is much to be thankful for. The average funding status of Canadian plans remains healthy at 103%, and the average five-year return was 11.7% as of Dec. 31, 2007—thanks to bullish Canadian equity markets. Canadian plan sponsors are feeling optimistic about the current volatility, with only 15% saying the credit crisis has made an impact on the way they view fixed income, compared to 29% of U.S. respondents.

Despite the popular conception of declining DB plans, 97% of existing corporate DB plans in Canada are committed to maintaining their defined benefit programs for their current and future employees, according to the research. Respondents expressed their belief in DB’s ability to provide an adequate level of retirement savings for their employees and that DB plans enhance recruitment and retention.

However, the research indicates that plan sponsors are now at a crossroads. “What you told us is that you’re not being complacent, and you’re not worry-free.” said Chiappinelli. “What keeps you up at night are risk management, the low-return environment and volatility.”

While corporate plan sponsors are most concerned with low returns, he explained, public plans worry about risk management. Both are keeping an eye on pension reform, as many plan sponsors regard the regulatory environment as a major barrier to the health of their plans.

Despite the expected shift out of Canadian equity among pension plans at the end of 2007, Chiappinelli said, Canadian equity is down only 0.5% from last year. U.S. equity, fixed income, real estate and cash all displayed a similar resilience. “We expected a significant shift due to the results of our 2007 survey,” he said. “But these changes have been very modest.”

Alternative investments are receiving increasing attention from the full spectrum of Canadian pension plans, with 43% of respondents planning to add infrastructure to their portfolios, 34% adding real estate, 25% private equity and 17% hedge funds. However, implementing these solutions is proving difficult for some, according to Chiappinelli.

“Despite the positive role alternatives can play in helping plans diversify their returns and reduce risk, Canadian plans have not adopted alternative investments as much as their U.S. counterparts,” he said. “Many Canadian plan sponsors report that their investment guidelines do not allow the use of alternative investments or shorting. As well, many plan sponsors indicate that they need more education on alternative investments.”

Extension strategies—known as 130/30—are popular with Canadian plan sponsors, with 46% of public plans and 26% of corporate plans currently using or considering them. But concepts, such as shorting, that are intrinsic to these strategies have presented challenges to investment committees, which are traditionally wary of such things.

Hedge funds are also on the minds of large plan sponsors—in excess of $1 billion—with 31% expecting to increase their exposure to long/short and market neutral funds and 29% looking at multi-strategy funds.

To comment on this story, email jody.white@rci.rogers.com.