Aon’s Canadian pension risk survey: sustainability, de-risking and more diversification
Since the global financial crisis in 2008, pension plans in Canada have been making slow progress towards returning to fully funded status. In 2018, Aon’s median solvency ratio crossed the 100% threshold for the first time in over a decade, only to fall back to 95.3% at the end of the year due to falling bond yields and equity market volatility.
In spite of market volatility in 2018, or perhaps as a direct consequence, we have seen a big increase in the number of plan sponsors working towards a long-term goal of sustainability.
Plan sponsors with a long-term plan identify sustainability - i.e. having an affordable level of contributions with low volatility - as their lead strategy in reaching their long-term goals (53%).
The number of risk settlements among private sector sponsors was smaller than expected given that most plans would have crossed the 100% solvency funding threshold in 2018, a good proxy for plan settlement costs. This is an area where risk monitoring, longevity and long-term objectives are particularly important.
De-risking strategies still trending
In keeping with 2017 trends, private sector sponsors favour annuity purchases for removing liabilities – 14% of them have acted on this, and another 26% plan to do so.
Across both sectors, public and private sector, the number of sponsors considering hedging longevity risk has reduced over the past two years—dropping by 9% among private sector sponsors and 21% among public sector sponsors. Even though intentions to hedge longevity risk appear to be low, we anticipate this will change over the next few years once plan sponsors have gone through one valuation cycle with the new MI-2017 projection scale and start turning their attention from current mortality assumptions to the uncertainty inherent in future assumptions.
More diversification for better protection
On the investment side, plan sponsors are looking for stronger diversification as a way to better protect their portfolios. The investment trends of more global diversification and use of alternatives continued in this year’s survey responses, with illiquid alternatives and foreign real estate being of particular interest.
Sponsors are slowly moving away from traditional asset classes and towards alternatives, particularly foreign equities, real estate and illiquid alternatives (such as private equity, private debt, infrastructure and other real assets). The low interest rate environment has also left some plan sponsors seeking strategies to reach for better returns, as we find a willingness to take on more credit in their fixed income portfolios, including an increase in exposure to return-seeking bonds (22%) and corporate bonds (13%).
To delegate or not
With layers of complexity in the markets and sophisticated investment solutions, plan sponsors are turning to delegating a few, if not all, investment functions over to an external provider. For instance, 43% already outsource asset manager monitoring, and another 31% say they are very or somewhat likely to do so.
The interest in moving forward with delegated solutions follows an upward trajectory from 2017, except for modest drops in implementing a glide path, tactical asset allocation and hedging.
A focus on risk
We find a cost threshold exists beyond which sponsors are not willing to hedge pension risks. The most notable change in attitudes since the last survey is with respect to those who stated they will not hedge their risks. The proportion not willing to hedge has come down in all four risk categories, with three of the four categories (inflation, interest rates, currency) showing reductions of 6% or more.
This is an important shift in attitudes which, if it continues in the future, will result in more time and effort spent on developing appropriate hedging policies.
To have access to the Pension Risk Report – Canadian findings, please click here.