Pension plans have had a trying time over the last few years. Stocks have taken investors for a ride, and a low interest rate environment is the new normal. Following is a review of the themes and issues we’ve covered since 2008 in this web-exclusive article.
Just before the markets began their tumble in the fall of 2008, plans were dealing with what were then considered low rates and signs of economic trouble. It didn’t seem as though a repeat of 2001/02 was on the horizon, but there was a bit of uncertainty about what was ahead.
“If 2008 produces negative rates of return and then 2009, I might start to get a little more concerned,” said H. Clare Pitcher, an actuary with Buck Consultants.
Unfortunately, the negative rates of return in 2008 turned out to be terrible.
In the 2009 report, plan sponsors were extremely concerned. Negative returns were in the double digits for most, and some plans lost more than a quarter of their value. Just six plans out of that year’s Top 100 were able to avoid reporting a loss.
While risk management is always an issue, it seemed much larger then. Plans needed to look at and implement new risk management techniques. “I’m a pessimistic actuary,” said Mercer senior partner Paul Forestell. “My view is that it could happen again, and people need to be ready for it.”
Read: 2013 Top 100 Pension Funds Report: Bouncing back
The following year, there was some cautious optimism. Assets for the Top 100 plans rose more than 10%, and markets began to rebound. However, those pesky liabilities were continuing to grow.
“People were certainly better off at the end of 2009 than they were a year earlier, but we are still 20% below our peak,” said Peter Lindley, president and head of investments at State Street Global Advisors, Canada. “And even at the peak, some plans were already in some form of deficit. We’re not entirely out of the woods; we are just in a less dense patch than [where] we were.”
In 2011, plan assets were up again as markets continued to rally higher. Despite this positive news, there was a need to be less dependent on equities. Many of the larger public plans were already changing their asset mix to help reduce volatility and looking at liability driven investing (LDI). Other plans just needed to take the next step.
“A lot of people talk about LDI, but my sense is that there’s a lot of talk and not necessarily a lot of action,” said John Crocker, then the president and CEO of the Healthcare of Ontario Pension Plan. “It has required a huge amount of effort on our part over many years, in terms of changing policies and procedures and setting the right benchmarks.”
By 2012, the news wasn’t as positive despite the years past. Even though there was an increase in plan assets overall, one-quarter of plans suffered a loss. And uncertainty continued to reign. While shifting away from equities into fixed income may have worked in the short term, it’s impossible to know if that will be a good move in the future.
“The challenge with fixed income is that bond yields are low, based on historic levels, and plan sponsors are asking if this is the right time to buy them,” explained Ian Markham, Canadian retirement innovation leader with Towers Watson. “But there is also nervousness around equity markets. So there’s no place to hide, and you’re not going to know for a year or two whether you made the right decision. In some cases, it could be 20 years before you know.”
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