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Amid volatility, Canadian pension plan sponsors focus on long-term goals and market risk


Aon’s Pension Risk Survey shows increase in delegated solutions, diversification

TORONTO (October 17, 2019) – Entering 2019 amid market volatility and a shifting regulatory landscape, Canadian pension plans are increasingly focused on implementing long-term goals and mitigating asset risk, according to the latest Pension Risk Survey from Aon plc (NYSE:AON), a leading global professional services firm providing a broad range of risk, retirement and health solutions.
The biennial Canadian Pension Risk Survey – part of a global series of Aon surveys that follow defined benefit (DB) plan sponsors’ risk management attitudes and practices around the world – suggests that plan sponsors are taking a more strategic approach, with a greater focus on goal-setting, as well as delegated investment management, alternative assets and global diversification.
“2018 was the best of times and the worst of times for plan sponsors hoping to adjust their plan’s risk profile, as median solvency whipsawed off decade highs in just months, forcing plan sponsors to be quick to react – or miss out,” said William da Silva, Canadian Practice Director, Retirement Solutions, Aon. “De-risking remains an opportunity, but it will require thoughtful attention not just to long-term objectives, but also to risk monitoring and longevity issues – which so far seem not to be on many plan sponsors’ radar. With the trend in funding rules shifting away from mark-to-market measures in favour of a long-term focus, plan sponsors should be careful to ensure that optimal decisions are made to balance the need for returns with management of cost volatility.”
“When it comes to investments, plan sponsors are embracing more active approaches to managing market risk,” said Erwan Pirou, Chief Investment Officer for Aon’s Delegated Investment Solutions in Canada. “We’re seeing more delegated management, global diversification and alternative assets in the mix, but sponsors will need to continue to be dynamic in their investment stance, while paying even closer attention to risk mitigation. Recent gains from equities and a fall in interest rates have pushed down future returns on many asset classes, meaning plan sponsors must focus on how to maximize risk-adjusted returns.”
Key Facts:

  • 96% of plans have a long-term strategy to reach their objectives, up from just 50% a decade ago.
  • More than half of 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 long-term goals.
  • A high proportion of sponsors have already deployed or are likely to turn to delegated investment solutions to better manage asset risk. For instance, 43% already outsource asset manager monitoring, and another 31% say they are very or somewhat likely to do so.
  • Key shifts in portfolios include a move away from traditional asset classes and towards alternatives, particularly foreign equities, real estate and illiquid alternatives like private equity and infrastructure.
  • The proportion of sponsors not willing to hedge pension risks declined. In particular, more are open to hedging inflation risk, interest rate risk and currency risk.
  • Annual monitoring of pension risk remains the most common practice, but asset values and performance tend to be monitored more frequently, with 25% doing so monthly or weekly. On funding levels, 46% of sponsors monitor risk quarterly or more frequently.
  • In response to provincial regulatory reform, 75% of Quebec plan sponsors intend to make changes to funding strategy and 73% to investment strategy. In Ontario, where new regulations are expected soon, 44% intend to make changes to funding and investment strategies.
  • Cyber risk is an emerging threat to all businesses, including pension plans, but the survey suggests that many plans have yet to take action.

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