Canadian Plans Surviving but Sponsors Fretting

October 22, 2008 ( - New research from Pyramis Global Advisors, Fidelity Investments' institutional asset manager, reflects that while Canadian pension plans are surviving market volatility, there is substantial concern about how they can continue generating returns in a low-return environment.

A Pyramis news release said Canadian plans are on very solid ground, having gotten a boost from strong Canadian equity markets with five-year average returns of 11.7% and funding ratios with the average funding status at 102.7%. Additionally, the majority of plans (67%) report that their plans are funded at more than 100%.

The second annual Canadian Defined Benefit Research from Pyramis Global Advisors surveyed corporate and public defined benefit (DB) plans with over $200 million. Together they represent over $427 billion in assets.

According to the announcement, there are regional funding level differences with Eastern pension plans reporting average funding 99.37% which is below the national average.

In comparison, plans in Central Canada did the best, reporting funding levels well over the national average (106.4%)—an interesting finding given the deepening economic slump in Central Canada. Western Canadian plans were also above the national average with funding levels at 101.6%, Pyramis found.

Commitment to DB

The positive news is that the vast majority (97%) of existing corporate DB pension plans in Canada are committed to maintaining their defined benefits program for their current and future employees. Most plan sponsors believe in the ability of DB plans to provide an adequate level of retirement savings for their employees and that DB plans offer recruitment and retention benefits as well (See  Survey Indicates DB Freeze Wave is Over ).

The Pyramis poll asked the DB sponsors for their top concerns and found nearly a   quarter (23%) name the low return environment as their number one worry. Risk management is another major area of focus (20%) along with market volatility (18%).

Meanwhile, risk management is the main source of concern for public plans. While public sector funds, which tend to be larger than corporate plans, are more able to access more alpha-generating asset classes and strategies such as infrastructure and private equity, they still need to ensure they can manage the new risks associated with them.

Pyramis' research also shows that, while Canadian pension plan sponsors are interested in using alternative investments, many are facing challenges in utilizing the asset class.

"Despite the positive role alternatives can play in helping plans diversify their returns and reduce risk, Canadian plans have not adopted alternative investments as much as their U.S. counterparts," said Peter Chiappinelli, Senior Vice President, Asset Allocation Strategies, Pyramis Global Advisors, in the news release. "Many Canadian plan sponsors report that their investment guidelines do not allow the use of alternative investments or shorting. As well, many plan sponsors indicate that they need more education on alternative investments."

An alternative asset class that continues to be a main area of focus for Canadian plan sponsors is extension strategies (commonly known as 130/30) with 46% of public plans and 26% of corporate currently using or considering using these strategies, Pyramis found (See  Actively Seeking Alpha ).

While the majority of plan sponsors don't consider 130/30 to be alternatives, plan sponsors have still run into challenges implementing these strategies. Among the top reasons for not considering 130/30, plan sponsors indicate that it would be too difficult to explain these strategies to their pension committee.

A common concern voiced by many plan sponsors regarding using alternatives is that they believe risk management is more challenging than with traditional asset classes.