Canadian Plan Sponsors Seek Underfunding Rx in Higher Returns

September 16, 2004 ( - A new Greenwich Associates study finds that Canadian pensions are moving aggressively to deal with widespread underfunding by, among other things, beefing up their mandates in foreign equities.

In their effort to bolster overall portfolio returns, Canadian institutional managers are banking that they can still reap relatively strong returns out of international stock positions and alternative investments. Even though the 30% limitation on foreign securities is still in force, Greenwich Associates’ Toronto-based consultant Lea Hansen notes that Canadian funds still have some leeway to further increase foreign investment.

Additionally, Canadian institutions still have room to expand their allocations to private equity and hedge funds, according to the report. Canadian plan sponsors now have $20.1 billion invested in private equity, up from just $6 billion in 2000, $8 billion in 2001, and $14.6 billion at the end of 2002.  Not that they aren’t already moving in that direction.  Greenwich said while hedge fund allocations round off to just 1% of total institutional assets for both 2002 and 2003, the absolute amount invested jumped to $8.8 billion from $6 billion over the period – an increase of almost 50%.  Looking ahead, the number of Canadian institutions expecting to increase their alternative asset allocations greatly outpaces those anticipating a reduction in the class.  

Solvency ratios have been falling steadily among Canadian pension funds for the past four years. After hitting 112% in 2000, average pension fund solvency ratios have dipped to 95% in 2004. Some of Canada’s largest pension funds are part of the problem: As many as 17% of 70 Canadian funds with assets of more than $1 billion are less than 90% funded, and 9% of these jumbo funds are below 75%, Greenwich said.

Manage Meant

Canadian plans are also hiring new investment managers at an unprecedented rate, according to the report.  For example, even as these institutional investors reduce the amount allocated to fixed income, the proportion of plan sponsors hiring active domestic bond managers rose from 62% in 2003 to 68% this year.

“Corporate and public pension plan sponsors in Canada are looking to ensure their ability to generate enough asset growth to raise their solvency ratios to more comfortable levels,” Hansen said in a news release. “To that effect, they are working to generate incremental returns from core asset classes, they are investing in alternatives and in both cases, they are bringing in new specialty managers to carry out these strategies.”

Similar trends can be seen in domestic stocks, where allocations were stable year-to-year and twice as many institutions plan to cut their allocations as plan to add domestic stocks in the future. Despite this retreat, demand is intensifying among investors for domestic growth stocks, which were used by 42% of institutions in 2003, up from just 38% in 2002. Mandates for value stocks also increased, with usage jumping to 57% from 41% year-to-year.

Pay Pulse

Average total cash compensation for Canadian plan sponsors in 2003 totaled C$163,900. Average salaries rose by nearly 3%, from C$116,300 in 2002 to nearly C$120,000 in 2003, and bonuses increased slightly at a similar rate to C$44,300. Despite the increase in salary, bonus levels decreased 4% to just over C$15,000 in 2003.