Pension plans today face risks that go well beyond the scope of traditional asset management. The political environment—as retirement confronts many Canadians— looms large, in ways that are positive as well as negative. During the conference, a panel of veteran plan sponsors addressed questions and issues on how drastically the playing field has changed when it comes to managing the risks to pension plans.
“People don’t think we’re nerds anymore,” says Derek Dobson, CEO and plan manager of the CAAT Pension Plan. “The relevance of retirement savings is now higher in the news cycles,” which means more political scrutiny. But even for plan members, there are acute expectations.
“Even the thought that we’re looking at something (i.e., early retirement rules) sends shivers down people’s backs,” he adds, making transparency and engagement with plan members imperative.
Conventional financial risks still matter and Dobson enumerates the chief ones: equity market risk, interest-rate risk, and inflation risk.
However, the flavours of those risks have changed, says John Zhang, senior manager, quantitative investment risk, CPPIB. Before 2007, the focus was on market risk; after, credit risk, liquidity risk and operational risk saw light of day and now it’s not good enough to have a risk measure that is backward- looking. It has to be forward-looking as well. Hence the rise of stress testing in the enterprise risk management framework.
While inflation is always a risk, Dobson points out just how much wage inflation can upset plan projections. And the pyramid of compensation is changing, at least among his members. New hires have a higher age of entry—which means their end benefit is more expensive to provide. And, as colleges shift from full-time to part-time hires, the contribution base is eroded.
More than that, the low-inflation environment—apart from creating pressure on the solvency side as liabilities balloon out—may have an enduring impact, says Hugh O’Reilly, CEO of OPTrust.
“As discount rates are going inexorably downward,” O’Reilly notes, “the way that the actuarial profession has modelled their discount rate is a bit of black box. The discount rates that the black box produces have not gone down as quickly. There is certainly stickiness on the way down.” O’Reilly expects that stickiness to repeat as interest rates normalize.
With governments strapped for cash since the financial crisis, and contribution rates flat, pension plans are increasingly in an invidious spotlight, becoming cost centres.
“Politicians are not experts in pensions and there’s a lot of misinformation out there. Pension plans need to be proactive in presenting our side of the story in order for there to be a balanced view,” says Jim Keohane, CEO of HOOPP, “We need to be actually proactive with politicans. Pensions are not their expertise.”
But perhaps the ultimate risk is what Dobson calls “the value vacuum: “if our members—stakeholders—don’t understand that the value of what we’re providing is higher than the cost, then there’s no point going through with it.”