Towers Watson released its 30th annual Canadian Survey of Economic Expectations and the results predict a low interest rate environment to continue—to the detriment of pension plan funding. But, there will be lots of action on other fronts in the pension industry.
The survey is based on data gathered from mid-November to early December 2010 and provides projections from leading business economists, analysts and portfolio managers from more than 45 organizations.
The majority of economists and strategists surveyed see interest rates over the medium term remaining below the historical trend, “which creates an additional burden for the financing of traditional defined benefit (DB) pension plans,” cites the firm’s press release on the results.
Towers Watson’s Canadian retirement innovation leader Ian Markham says median figures show survey participants calling for returns to be down 30 to 60 basis points in the mid to longer term for pension plans with a typical asset mix.
He also says 2011 will be a year of “massive change” in the pension world. “For actuarial standards, we’ll have new mortality tables. This is great because it’s likely to reveal that you’re going to live longer,” Markham quips. “On the other hand it means likely higher liabilities, so it depends which hat you want to wear.”
On actuarial margins, Markham explains, “Previously actuaries had a mandate to include margins in their DB valuations; the new rules now say it’s really up to the plan sponsor, or whoever the party is who sets funding policy. So the actuary is going to have to have that debate, and if the plan sponsor says ‘No, I don’t want margins,’ the actuary will have to give the warnings about what that might entail. But there is the ability to cut back the margins. There are still regulators out there who have to sign off on these evaluations.”
A final change to actuarial standards concerns active management rewards. “Previously, it was pretty uncommon for actuaries to include in their discount rate for their going concern valuations a reward for active management,” says Markham.
“Certainly now the new standards tighten it up, so you have to have a very strong degree of due diligence by the actuary to decide whether to add in any reward for active management in the going concern discount rate.”
This year will also see restrictions on contribution holidays, tighter control of actuarial assumptions and greater frequency of evaluation report filing, as well as accelerated funding of benefit improvements. “If you’ve got a poorly funded pension plan you’re not going to be able to improve the plan without putting a lot of money into it,” Markham explains.
Some new plan designs may also be down the pike, Markham adds. “Ontario is dabbling with the idea of target benefit plans, which is a defined benefit plan where you can actually reduce the accrued benefits, which of course is anathema to all DB members now. So we’ll see where that heads.”
Plan sponsors avoiding equities
Towers Watson’s research shows pension plan sponsors are not taking the bait of high equity returns. Smaller plans are trending away from equities into fixed income, while plans with more than $1 billion dollars in assets are shifting away from both traditional equities and fixed income into alternatives such as infrastructure, hedge funds and real estate.
“In addition to broadening the sources of risk and return, more attention is being paid by the larger players to specialized investment strategies, especially within the alternative classes,” says David Service, a senior consultant in Towers Watson’s Investment practice. “The goal for many is to avoid the equity risk.”