How are Canadian plan sponsors making asset allocation decisions? And what are their top challenges? During his presentation, Carl Bang, president of Sun Life Institutional Investments Inc., presented the results of roundtable discussions with Canadian pension plan sponsors.
Asset allocation was a top theme that emerged during these roundtables. Bang said that despite the diversity of plans represented, allocations were similar across the board.
He explained that most plans focused on something close to a 50/50 split between defensive and growth-seeking assets, an interesting finding as plan sponsors pick their way through a tough investment and economic environment.
Bang said plans largely agreed on their top challenges, which included falling commodity prices, the slowdown in China, low to negative interest rates and the threat of a further (but short) Canadian recession happening.
“Interest rates were of particular concern,” explained Bang. “Even though risky assets have, in general, increased in value, this has not nearly compensated for the increase in liabilities due to rock-bottom rates.”
Due to these challenges, risk management was a key focus at the roundtables. “In the absence of an ability to predict the future with certainty, it’s necessary for pension plans to explore a number of possible future scenarios. For that reason, stress tests are now common,” Bang explained.
He advised plan sponsors to get ready for long-term low interest rates — and to plan accordingly. This includes focusing on alpha, reconsidering benchmarks, revisiting the illiquidity premium and weighing the need for plan design changes.
One key question for plan sponsors — how can they take a liability-driven investing (LDI) approach when rates are so low? Bang explained that low rates increase liabilities — and lower a plan’s funded ratio. That makes it very challenging to match assets to liabilities — some are using a glide path approach to increase their LDI commitment over time, Bang said. Others are headed in the opposite direction: “Not every plan is worshipping at the altar of LDI — some are deliberately underweighting long-duration bonds relative to their policy stance,”
Bang said. “Clearly, they’re hoping to see interest rates rise.”
When it comes to the search for uncorrelated assets, Bang explained that many plan sponsors are turning to illiquid private asset classes, although they recognize that the low correlation may be artificial. “The contrasting attitude of roundtable participants about illiquidity and alternative asset classes turned out to be the biggest debate,” Bang said.
He also explained how Canadian pension promises are paid in Canadian dollars but are backed by global assets and the visibility of exchange rates has risen and the ramifications are significant. Many plan sponsors stated that volatility matters, and there was a discussion about whether foreign equities and fixed income should be hedged.
Bang said Canadian DB plans also acknowledge the impact of the geopolitical landscape on Canadian investors. He said that plans must assess and monitor the impact
of geopolitical trends and events. The best guard against outcomes that are unclear is to stay diversified, he concluded.