With the start of a new year, there are several developments and trends that will likely impact Canadian pension plan sponsors in 2025.
Implementation of regulatory guidelines
In September 2024, the Canadian Association of Pension Supervisory Authorities published a new guideline for risk management for plan administrators and an update to their guideline for capital accumulation plans that was originally published in 2004.
The scope of the risk guideline is wide and covers all registered pension plans, including defined benefit, defined contribution, pooled registered, target-benefit and hybrid plans.
Read: Expert panel: How will CAPSA’s risk management guideline impact pension plan administrators?
The risk guideline has two distinct components: defining overall risk and risk management. With respect to defining overall risk, the CAPSA expects plan administrators to establish, in the form of a written statement, an overall risk appetite, risk tolerance and risk limits for each plan. Thereafter, the guideline addresses both a broad risk management framework as well as considerations for certain specific risks. Based on the guideline, pension plan administrators should identify specific objectives for their plans. Risk management practices can then be implemented to increase the likelihood that the objectives will be met through a four-step process: identification, evaluation, management and monitoring of risks.
The revised CAP guideline defines a capital accumulation plan as a tax assisted investment or savings plan where members make decisions regarding the investment of their individual accounts among two or more options selected by the CAP sponsor. Based on this definition, the scope of the CAP guideline is also broad and can include DC pension plans, group registered retirement savings plans, group tax-free savings accounts, as well as a number of other types of tax-assisted investment and/or savings vehicles.
The CAP guideline has been modernized to reflect changes in the pension landscape with respect to regulations and product innovation. It promotes good plan governance and disclosures to members, as well as outlining the responsibilities of CAP sponsors, administrators, service providers and members.
Read: How CAPSA’s updated CAP guideline will impact plan sponsors, members
The risk guideline and CAP guideline represent the views and expectations of Canadian pension regulators regarding leading practices for the management of pension plan risks and CAPs, respectively. One of the interesting aspects of the guidelines is that they explicitly recognize there are a wide variety of pension plans and CAPs in Canada, in terms of type, size and complexity. Therefore, the guidelines include the concept of proportionality, whereby sponsors and administrators are encouraged to adapt their practices to the specific circumstances of their programs. In 2025, plan sponsors and administrators will be creating and implementing plans to adhere to the two guidelines in a manner that reflects their circumstances and needs of their programs.
Continued de-risking
There has been a remarkable improvement in the funded position of many pension plans during the past few years. Based on Telus Health’s monthly pension indices, the solvency funded ratio of a typical DB pension plan increased by 37 per cent from the beginning of 2021 to the end of November 2024.
With most DB plans well-funded, including many plans that currently have a significant surplus, plan sponsors continue to assess whether the potential upside associated with the risks they’re taking in their plans is worth the possible downside should financial markets or other factors move in the wrong direction. In many cases, this assessment has led to de-risking activity.
For example, since 2021, pension plans have been transferring risk to insurance companies through group annuity purchases at a rate of almost $8 billion per year, with the 2024 volume expected to be even larger. In order to reduce risk in their plans, many plan sponsors have also increased their investment allocation to fixed income and/or alternative investments, as well as implemented liability driven investment strategies.
Read: DB pension plan sponsors facing “bottleneck” in annuities market: expert
As 2024 was another year in which the financial health of DB pension plans improved, significant de-risking activity is expected to continue and possibly accelerate in 2025. For plan sponsors considering de-risking their pension plans in 2025, it will be important to be proactive and to plan ahead, so they’re ready to take action when attractive de-risking opportunities arise.
Geopolitical risk
Although there have been concerns about geopolitical risk for some time, this risk appears to be increasing rather than decreasing as we begin 2025. Conflicts continue in a number of areas of the world, such as in Ukraine and the Middle East. In the U.S., the inauguration of a new administration in January creates additional economic uncertainty for Canada, including the possibility of new tariffs for Canadian exports to the U.S. Also, there will be a federal election in Canada before the end of 2025.
Pension plan sponsors should keep in mind that during periods such as this, there’s an increased likelihood that geopolitical risk could trigger volatility in the financial markets and affect the Canadian and global economies in ways that are detrimental to the funded positions of pension plans.
As with all pension risks, geopolitical risk should be evaluated by plan sponsors in 2025 and, if deemed material, action should be taken to manage and monitor this risk. For DC plan sponsors, this may include being ready to act quickly with appropriate communication to members should geopolitical events cause short-term losses in member account balances.
Read: What could a second Trump presidency mean for Canadian institutional investors?