“With a single digit equity market return, a flat yield curve and the weak funding status of many pension plans, sponsors should brace themselves for another tough year,” said Ian Markham, director of pension innovation at Watson Wyatt Worldwide, in a press release.
According to the release, the long-term gross return on a typical pension fund invested equally (50/50) in equities (domestic and foreign) and bonds is forecasted to return 5.9% in 2006, a decrease from the 6.5% predicted last year.
Markhamsaid that any improvement in the funding status of pensions will come from sponsor contributions and not market returns.
According to Watson Wyatt, as a result of the forecasted lower returns and pension plan funding status, plan administrators are considering a strange in investment strategy. About two-thirds of survey respondents indicated they plan to implement more creative solutions and move away from traditional balanced (stocks/bonds) portfolio investment strategies over the next five years. Some of these creative solutions include ‘liability-driven investing’ (matching liability growth to the extent possible) and ‘absolute-return investing’ (building a portfolio that yields positive returns regardless of equity markets direction).
Canadian economists and portfolio managers from 54 major financial organizations, such as chartered banks, investment management and other corporations, took part in Watson Wyatt’s survey. The full report can be purchased here .