With plan sponsors shifting their thinking from long-duration fixed income to other areas of the plan, including less-risky equity strategies, managers are in the hot seat to provide solutions.
“The big trend this year has been looking at equity asset classes and moving around the risk budget,” says Barber. “You’re starting to see plan sponsors looking to managers for low-volatility strategies, especially in developed markets that are likely to experience low growth in the coming years.” Plan sponsors can then shift the risk, he adds, applying part of their risk budget to regions where capital markets are experiencing growth—for example, emerging markets that are likely to grow in the coming years.
David Pennycook, vice-chair with Fiera Sceptre Inc. (No. 13), says plan sponsors aren’t holding their breath for stable equity market returns. And he agrees that they’re now asking managers for strategies beyond fixed income to mitigate volatility. “Because of the volatility last year, plan sponsors are asking managers for more products that counter that,” he explains. “Part of this includes alternatives like infrastructure, real estate and private equity.” While assets like these might be less liquid, they are long term and low volatility. These days, strategies that reduce volatility and increase returns have become a target for pension funds.
As plan sponsors look at other ways to reduce portfolio volatility, they are also making some big changes on the fixed income side. According to Andrew Forsyth, senior vice-president with PIMCO Canada Corp. (No. 22), liability driven investing needs to be carefully executed in this interest rate environment. At the same time, plan sponsors are looking for further diversification within their portfolios as they seek new returns. Part of this means giving their fixed income managers more wiggle room. “Plan sponsors want to go long to match their liabilities, but they also want alpha,” he explains. More and more, managers are being given the leeway to go off benchmark as they search for yield and diversification of risk.
Ontario versus Quebec
While the DB space is at a turning point, the DC side is also on the threshold of a new era. Managers are keen to embrace PRPPs. However, the federal government’s PRPP framework has the industry divided: while some see PRPPs as the perfect solution for many Canadians without pension coverage, others believe enhancements to the Canada Pension Plan (CPP) would be a better way to go.
In its budget, Quebec came down clearly on the side of PRPPs as the first province to set out detailed provincial rules around how they would work. Employers with more than five employees will be required to offer a voluntary retirement savings plan (VRSP), automatically enrol all employees with at least one year of continuous service and deduct contributions from payroll and remit them to the VRSP administrator.
PRPPs represent a huge new pool of capital for providers, says Tom Reid, senior vice-president, group retirement services, with Sun Life Financial. “PRPPs are going to have a profound impact on the money management space in Canada. In Quebec, there are two million workers not covered by workplace savings plans. Through PRPPs, even if each one puts away $1,000 a year, that adds up to $2 billion in incremental flows into retirement savings plans in that one province. $2 billion a year compounding will become an ever more material part of the retirement savings landscape in Canada.”
While managers are excited about the model, Ontario rained on the PRPP parade in its provincial budget, calling out what it sees as flaws in the approach. The budget outlined a number of issues, including the notion that PRPPs might replace other forms of retirement savings and the concern that costs might be too high. Ontario’s move is a source of disappointment to managers, says Barber.
“I was surprised and disappointed at what happened in Ontario—that will definitely slow down the momentum of PRPPs. I think we had a great opportunity there, but we missed it. Clearly, Ontario still favours the enhanced CPP model, so it’s going to take a long time to get this sorted out.”
In the end, although he thinks Quebec made a good move, Chinery doesn’t believe the PRPP model will work if the other provinces don’t buy in. “I think there are big question marks on whether or not PRPPs are the right way to go. I think PRPPs have the potential to push people into target date funds, exchange-traded funds and index passive approaches because they want to keep the costs down. For managers in the passive space, that’s good news. The challenge is getting people into them.”
Will 2012 offer clearer direction on where to go next? Right now, this year is looking a lot like last year when it comes to bond and equities. In fact, with China facing a slowdown and Europe still teetering on the brink, things could get decidedly worse. And, clearly, managers in the DC space will have their eyes on what other provinces do about PRPPs over the next several months.
The best way forward seems to be steady as she goes—and, of course, keep on dancing even as market conditions keep changing up the music.
Caroline Cakebread is editor of Canadian Investment Review. caroline.cakebread@rogers.com
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