Canadian Companies Fail to Consider Key Risk Exposures

Two-thirds of the Canadian respondents expressed concerns about financial risk. But this focus on financial risk could mean that other types of risk—for example, strategic, regulatory and governance risks—fall by the wayside.

“One important caution for plan sponsors is, don’t allow your concerns about financial risk to outweigh other concerns,” said Rob Vandersanden, senior retirement consultant in Hewitt’s Calgary office, in a webcast on the survey results.

A large percentage of respondents ranked pension expense volatility in annual financial statements as a major concern (67% globally and 62% in Canada). However, Canadians may be behind their global counterparts in implementing strategies to manage this volatility.

Canadian companies have the lowest level of adoption of liability driven investment strategies compared to the U.S. and the U.K. Furthermore, only 11% are using liability benchmarking, while the vast majority (81%) set investment benchmarks based on market indexes.

“The key to remember here is that to effectively manage a pension plan, you really can’t do that looking only at assets,” said Paul Rangecroft, senior retirement consultant with Hewitt Associates. “We would hope that companies are looking more at assets and liabilities in aggregate.”

Even with funding concerns at the forefront, Canadian employers want to keep their defined benefit (DB) plans intact. In terms of specific actions taken or being considered, 45% said they’ve increased their foreign investments and 21% said they’ve reduced their equity allocations. But 33% said they’ve made no changes at all. “Overall, the Canadian results revealed a much stronger commitment to maintaining plan design,” added Vandersanden.

That’s in contrast to the U.K., the U.S. and continental Europe, where closing the DB plan to new entrants, freezing accruals or contemplating buyouts by insurers or investment banks are becoming much more common. However, too much emphasis on short-term volatility could cost these companies in the long run, Hewitt experts noted.

“HR professionals will be left in the position where many of the tools in their arsenal for long-term retention and workforce management will have disappeared,” said Rangecroft.

Looking at strategies that employers may consider adopting in the future, almost one-quarter of Canadian respondents intend to increase their exposure to alternative assets to help address the asset/liability mismatch. And while fewer Canadian employers intend to hedge interest rate risk compared to their global counterparts (33% do not intend to hedge versus 16% globally), Hewitt expects that we’ll see more hedging in the future once people become more comfortable with it.

To ensure that your pension plan is well positioned to manage risk on an ongoing basis, Andrew Hamilton, senior retirement consultant with Hewitt Associates, suggested actions such as developing a formal risk management plan, looking beyond just financial risk to consider other risk types, embedding pension risk in overall enterprise risk management, measuring your exposures frequently, and periodically reassessing your risk management framework and strategies.

“As the world changes around us, it’s important that your risk management plans change as well,” added Vandersanden.

Alyssa Hodder is Editor of Benefits Canada