A survey finds that more than 75% of senior finance executives across Canada and the United States plan to focus on reducing risk in their defined benefit (DB) pension portfolios, rather than seek greater return on assets.
This is one of the central findings in a survey of finance executives conducted earlier this year by CFO Research Services in collaboration with Towers Perrin.
So what are companies doing now to manage pension plan risks? The predominant course is to rely on portfolio management techniques rather than plan design changes or transfer of risk to a third party.
Respondents from organizations with large plans and more mature benefit obligations reported taking steps to put in place a liability-driven investment strategy to manage the risk and volatility issues. Some reported using financial derivatives in their pension plan portfolio—most commonly, interest-rate swaps and futures. However, overall, use of derivatives remains modest at this point, according to the survey report.
For the most part, companies continue to follow an incremental approach relying on near-term tactics to manage what are essentially long-term obligations requiring more comprehensive solutions.
Only one in five (21%) reported close coordination of pension risk with a broader risk management framework such as enterprise risk management. Nearly half (46%) said there is some degree of coordination. The remaining third (33%) said that pension risk is not coordinated with a broader risk management strategy or reported that they had no risk management program in place. Click here to download the survey from Towers Perrin’s website.
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Majority of Canadians Don’t Understand TFSAs
Tax-free savings accounts (TFSAs) will be available next year, but more than three-quarters of Canadians don’t know what TFSAs are or only have limited knowledge of them, according to a survey.
The ING Direct survey finds that of those with some or full understanding of TFSAs, less than 70% knew about the key product features, namely the $5,000 annual tax free maximum and that funds are not taxed even when withdrawn.
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Even those with a good understanding of the product were unaware that the tax-free accounts offer the ability to carry forward unused contribution room and that any amounts withdrawn can be put back into a tax-free account at a later date.
“We feel there’s a lot of education that needs to take place between now and January, so that Canadians are fully aware of their options for saving come peak investment season,” says Peter Aceto, president and CEO of ING Direct. “The sooner people understand, the sooner they can start to plan for their savings goals.