The economic downturn hit pension investors hard. Were there any safe harbours?

Chris Kautzky, a senior investment consultant with Hewitt Associates, looked at current and future pension investing trends in a webinar co-hosted by Benefits Canada and the Canadian Pension and Benefits Institute.

With both bond and equity managers exhibiting poor performance, 2008 was a challenging year for pension plans, said Kautzky. Alternative assets such as hedge funds, private equity and infrastructure also suffered.

“Unless you held just federal government bonds, the ‘nowhere to run, nowhere to hide’ song was consistent with capital markets last year,” he added.

Not that plan sponsors didn’t try. Looking at data from Greenwich Associates, Kautzky noted that allocations to equities declined by 5% between 2006 and 2008.

In contrast, allocations to real estate and private equity were up slightly, as plan sponsors sought new sources of return outside of equities. Infrastructure also saw some growth, with an 11% increase in allocations.

Risk Fix

Kautzky said risk management has become a key priority for plan sponsors in light of the equity market meltdown.

According to Hewitt Associates’ 2008 Global Pension Risk survey, plan sponsors around the globe ranked financial risk — particularly, P&L volatility, cash flow requirements and balance sheet volatility — as their primary concern.

To manage these types of risks, plan sponsors are taking a closer look at their liabilities. However, Canada is behind its global counterparts in implementing LDI-related strategies.

“Canada had the lowest use of liability benchmarks of any of the regions covered by the survey,” said Kautzky, “so this is an area in which we expect to see some growth in the future.”

He added that risk management will likely become a greater part of the plan sponsor’s role in the future.

“There is no single road map for managing risk, but this will likely include more frequent measurement of the key funding measure and a shift in the plan sponsor’s objectives from asset-only to asset-liability.”

Action Items

What else can plan sponsors do to survive the downturn? “With regards to changing the long-term asset allocation strategy, plan sponsors should not let current conditions deter them from conducting analysis and taking action,” Kautzky suggested.

“While there are practical challenges to making significant moves very quickly, an implementation strategy to make changes gradually and that takes advantage of attractive valuations should prove effective over the long term.”

Given today’s poor market conditions, Kautzky said it’s also critical for plan sponsors to measure and monitor performance, and the extent to which managers are suffering from style drift.

This presentation was the first in a series of webinars co-hosted by Benefits Canada and the Canadian Pension and Benefits Institute.

For details on upcoming webinars, contact Jennifer Hughey at jennifer.hughey@rci.rogers.com.

(04/21/09)