Canadian pension plans take the risk-shedding route

Jay Cooper explores the myriad ways Canadian pension funds are implementing de-risking strategies

Canadian defined benefit plans are generally enjoying a better funded status and a stronger commitment from their sponsors than defined benefit plans in many other parts of the world. Now those plan sponsors are turning to a number of de-risking strategies to keep those plans alive and well funded for the long-haul.

Those de-risking strategies include more than just a liability driven investment (LDI) approach, which is certainly gaining interest in Canada just like in other regions. But eliminating risk could include a whole host of other options for Canadian plans including greater allocations to inflation-protected assets, changing Canadian equity benchmarks to lower their risk and even making changes to plan design to lower investment risk for the plan sponsor.

Instead of each plan following the actions of the largest plan sponsors in Canada, individual plans are taking a closer look at their specific risks, and that has caused plans to find numerous de-risking solutions. “Plans are becoming more decoupled with one another,” said Russell senior consultant, Tom Lappalainen. “Each plan is looking at its own circumstance. Now people are very conscious of their own plan-specific risks.”

Committed to DB
Many say Canada’s interest in de-risking comes from the country’s general commitment to keeping defined benefit plans open. “There’s still a strong marketplace for defined benefit plans in Canada. In Canada, the majority of defined benefit plans remain open,” said Scott Clausen, an actuary and partner in Mercer’s retirement, risk and finance business. Towers Watson senior consultant, Janet Rabovsky estimated that 94% of all pension assets in Canada are still in defined benefit plans.

The majority of those plans appear better funded than defined benefit plans in many other countries. It is hard make generalisations about funded status as countries and individual plans use different valuations, but an Aon Hewitt study of funded status among corporate defined benefit plans in the major stock indices of their respective countries showed that Canada’s corporate plans had an average funded ratio of 88% at the end of the third quarter of 2010, compared to 82% for US companies, 85% for the United Kingdom and 66% for Continental Europe.