The Pension Investment Association of Canada is urging the federal government to reconsider the cessation of real return bond issuances, citing potential financial impacts to defined benefit pension plans and members.
In an open letter to the Ministry of Finance, the PIAC said the decision was made “without fulsome consultation or warning” and impacts pension plan sponsors’ ability to responsibly invest and manage the pension entitlements of plan members. It also noted these bonds can assist pension plan sponsors in meeting their financial obligations to plan members amid rising inflation.
“As long-term investors responsible for managing long-term liabilities, pension plans are logical purchasers of [real return bonds],” wrote Peter Waite, executive director of the PIAC, in the letter. “Many of our pension plans pay a pension benefit that is indexed to inflation so that pensioners maintain their purchasing power. Thus, for those plans choosing to buy and hold real return bonds, it can serve as a valuable investment tool to keep up with the need to pay out indexed pensions.”
With pension plan sponsors under increasing pressure to maintain inflation-sensitive portfolios, they may look to real return bonds issued in markets outside of Canada, said the letter, noting this approach is more expensive and doesn’t offer direct linkage to Canadian inflation.
“Government interventions such as this make pension plan administration and investment more difficult and may push plans to seek alternative investments in potentially riskier markets,” said the letter. “Now, more than ever, investors face greater pressure to seek out inflation-sensitive assets.
“Ageing demographics are likely to only amplify this demand in the future. This decision reduces the diversity of assets available to pension plans and also raises questions about the Government of Canada’s confidence in addressing the current inflationary environment.”