The Association of Canadian Pension Management is urging the federal government to reverse its position on the cessation of real return bonds and open a stakeholder consultation on the matter.
In an open letter, the ACPM said the real return bonds are an important tool in building a balanced portfolio that manages inflation risk. In addition, it noted pension plan sponsors and insurers that offer annuities indexed to inflation will be less equipped to hedge their liabilities as a result of this decision.
“Robust risk management practices are an integral part of pension plan security and sustainability and ceasing the issuance of real return bonds in Canada reduces retirement benefit security by reducing the ability of both pension plan sponsors and individual Canadians to manage risk.”
The letter also said the trading of real return bonds provides data that helps determine pension plan funding requirements as well as a reference point for insurers to determine the cost of settling benefits.
In addition, the yield on real return bonds is used as a benchmark to determine various defined benefit pension plan liabilities, including liabilities that are used as a basis for funding requirements and financial statements.
“Without real return bonds, plan sponsors will lose a key market-related signal of long-term inflation, which could negatively impact plan member retirement security and the accuracy of both financial statements and lump-sum payouts to members who terminate from a pension plan.”