Canadian Plan Sponsors Slower to React to Market Volatility

December 18, 2009 ( - The past year’s financial market turbulence has many Canadian organizations contemplating - but not yet implementing - actions to better manage the risks associated with their defined benefit (DB) pension plans, according to a new survey conducted by Hewitt Associates.

Hewitt pointed out in a news release that from mid-June to early November of 2008 the aggregate funded ratio of S&P/TSX company-sponsored defined benefit plans dropped from 112% to 86%, and by the end of November 2009, their funded ratio had improved to 97%. While the extreme volatility produced some change in attitude toward pension risks on the part of plan sponsors since Hewitt’s 2008 Global Pension Risk Survey conducted before the financial crisis, unlike their counterparts in the U.K. and U.S., employers in Canada are not rushing to make changes, preferring to take a more cautious approach to pension risk management, the 2009 survey found. 

Hewitt said this could be because Canadian respondents do not see a business impact of higher company contributions to pension plans. Of the 84% of respondents expecting to have to make higher contributions as a result of the credit crisis, only 4% indicated that the additional contributions would have a significant impact on their business.

“Funding relief measures provided by pension regulators clearly softened the blow of the events of the past 18 months,” said Rob Vandersanden, a senior pension consultant in Hewitt’s Calgary office, in the news release. “However, 55% of Canadian employers indicated they would not be taking advantage of the relief measures, primarily because they were not cash constrained. Perhaps, like Canadian banks, plan sponsors in Canada did not suffer from the effects of the credit crisis to the same extent that organizations in other countries did.”

Canada continues to have the lowest global incidence of plan closures; however, Canadian employers are at least a year behind American and British organizations in implementing pension risk measures. Forty-four percent of Canadian DB plan sponsors have not yet developed a long-term strategy for managing pension risk.

The survey did find Canadian employers are taking some action. “What is encouraging is that 45% of organizations with DB plans are at least measuring their pension risk more often,” said Vandersanden.

In addition, in terms of investment changes, there are two dominant strategies: a greater diversification of return-seeking portfolios (out of Canadian equities and into alternative asset classes and foreign equities), as well as a net movement towards more liability-driven investment strategies (liability-matching assets, liability driven investment (LDI) strategies and dynamic asset allocation).

But, while employers in the U.S. and U.K. are showing significant interest in delegated investment services that allow them to delegate all or part of the investment process, this is still a new concept in Canada, Hewitt said.

More than 400 organizations from around the world responded to Hewitt’s 2009 Global Pension Risk survey in September 2009, including 80 from Canada.