As a plan sponsor for a defined benefits (DB) program, what keeps you up at night? Is it volatility? Is it the funded status of your plan? If so, you aren’t alone.
At this morning’s Canadian Pensions and Benefits Institute Fundamentals session on the future of DB, Ognjen Sosa, an investment strategist with Pyramis Global Advisors, revealed that according to recent global research by his firm, 14% of Canadian benefits plan sponsors said volatility was their main concern. However, that is much lower than your U.S. counterparts. Thirty-six percent of corporate plans in the U.S. said the same, as did 19% of public plans.
However, while this was the main concern for U.S. plans, current funded status topped the Canadian list of concerns for 36% of plans. And with 95% of plans, on average, being underfunded, that is a valid concern.
It’s been a tumultuous few years for pension plans and although markets are improving and pension plans are noticing better returns, many are still cautious—which isn’t necessarily a bad thing. Plans are now re-evaluating their investment portfolios and paying closer attention to their assets and liabilities.
In fact, Sosa’s research showed that 67% of Canadian plans said they need to better match their assets and their liabilities. Also, 68% realized they needed more downside protection, 58% felt their risk management needed improvement and 39% were not as diversified as they thought.
As plans attempt to regain a positive funded status, acting on these realizations will be critical. Sosa said one of the common themes to that end is global diversification and reducing home country biases.
However, by doing so, plans increase their risk by exposing themselves to foreign currency, he added, suggesting, “As you decided to diversify, you should make informed currency hedging decisions.”
According to the Pyramis research, 38% of Canadian plans currently don’t have a currency hedging policy for equities.
Related topics:
The future of DB: balancing assets and liabilities through governance