Defined benefit (DB) pension plans around the world are facing significant pressure as a result of the market turmoil that started in 2008. Many plans have been closed to new participants or have frozen accruals. However, compared with U.S. and U.K. companies, Canadian organizations appear more committed to offering DB plans, according to a recent SEI Investments survey of 105 Canadian, American and British pension executives. The majority (78%) of Canadian pension plans remain active and open, compared with just over a third (35%) of plans in the U.S. and U.K. combined.
When it comes to expressing a heightened interest in risk management and a goals-based approach to pension oversight, regardless of their commitment level, Canadian organizations (58%) are on par with their U.S. and U.K. peers (62%).
Despite the shift in focus, the organizations surveyed are spending almost half of their pension-related time on non-strategic tasks such as administrative functions and monitoring investment managers. The allocation of time to these tasks is even higher in Canada where internal resources spend 37% of their time on administrative tasks (versus 23% in the U.S. and U.K.) and 25% on monitoring managers (versus 21%). Relative to their peers, Canadians are less focused on managing pension assets in association with pension liabilities (44% versus 71%).
With regard to the strategic task of reviewing asset allocation and liabilities, Canadians dedicate only 11% of their time to this task, compared with their American and British peers, who dedicate 20%. This reflects the reality that few organizations globally have made formal asset allocation changes, despite the market volatility. Canadian executives are the least aggressive in this area: 49% have not made a change to their company’s asset allocation policy since the market meltdown began (versus 16% in the U.S. and U.K.).
Another strategic task that doesn’t always get the attention it deserves is monitoring the pension’s financial impact on the organization. Globally, more than half (56%) of executives admit that the pension is having a negative impact. However, less than a fifth (17%) of pension-related time is spent on monitoring this impact. And Canadians dedicate even less time (12%) to the task.
In Canada, organizations in which executives admit the pension is having a negative impact on corporate finances often rely on internal resources to make portfolio manager decisions with the help of a consultant (48%), compared with organizations that outsource portfolio manager decisions (29%).
As expected, pension scrutiny by the board or senior management and requests for long-term pension strategies are on the rise. While almost half of organizations (46%) on a global basis agree that this has occurred, the Canadian response once again varied depending on the approach to investment management. Only 29% of the Canadian organizations that outsource portfolio manager decisions face board and senior management scrutiny, versus 52% of the organizations that make portfolio manager decisions internally with a consultant’s aid. As a result, almost half (48%) of Canadian executives expressed concern about the traditional consultant model for pension investment management.
The worst of the market meltdown shows signs of easing, but given the increased pension scrutiny and shift in focus to liability and risk management, the need to proactively analyze options to effectively manage pension investments is at an all-time high. Allocating time and internal resources to strategic tasks that help match pension assets with liabilities and better control volatility should be a high priority for all organizations looking to regain control over their pension finances.
Terry Cameron is marketing director and Andrew Kitchen is managing director, solutions and services, with SEI Investments’ Toronto office.
tlicameron@seic.com
akitchen@seic.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the October 2009 edition of BENEFITS CANADA magazine.