“Whether it’s closed-door meetings, open letters from pension plan powerhouses or our surveys, Canadian pension plan sponsors are looking for more definitive decisions regarding pension plan reform,” says Scott MacDonald, head of pensions and financial institutions and client service with RBC Dexia. “And while pension reform is the hot topic, the challenges facing plan sponsors today are relatively consistent with responses generated six months ago. Aligning assets with future liabilities and the subsequent management of risk is still the primary consideration.”
Risk still top concern
With the international financial system lurching from the credit crisis to the global financial crisis to the sovereign debt crisis, plan sponsors’ current priority is risk management. And risk is taking many forms, as liquidity risk topped the list of concerns with 96% of respondents indicating that this risk was still of high importance, while shortfall risk ranked second, at 92%. Interest rate risk and counterparty risk were also significant, at 91% and 89%, respectively.
So what effect has risk had on asset allocation strategies? In general, not much. Plan sponsors are mostly satisfied with their positions, with roughly two-thirds making no adjustments to their foreign bonds, domestic equities and foreign equities allocations—68%, 65% and 67%, respectively. However, 28% of plans with more than $1 billion in assets will likely change allocations to “other” assets, primarily real estate, infrastructure, private equity and, more generally, alternatives. This is compared to the 14% of overall respondents that will increase their allocation to this sector.
In terms of plan sponsor priorities, things have not changed much since a 2009 RBC Dexia poll that identified matching liabilities with assets (48%) and low returns (38%) as primary challenges. The latest poll sees the same two issues in the forefront, and only slightly less urgent, at 43% and 35%, respectively.
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