Canadian pension plans should expect a decrease in returns across all asset classes and a weakening in investment opportunities in 2017, according to an economic outlook briefing hosted by Willis Towers Watson in Toronto on Thursday.
“ . . . The strength we’ve been seeing for a very long time is coming to a close. We don’t say it’s running off the cliff but we see it coming to an end,” said Denise Kehler, a senior consultant and portfolio strategist at Willis Towers Watson, during the event. “Overall, we think this is the most unstable that we’ve seen the economy for some time.”
A significant factor in the instability is policy uncertainty following the British vote to leave the European Union last June and the U.S. election results in November, she noted. “One of the things that markets really love . . . is the certainty of where things are going. So when we see around the globe that there’s political uncertainty . . . it brings a lot of risk into where returns are going in the future.”
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To prepare for the anticipated lower growth, Kehler suggested four strategies for plan sponsors to consider:
- Appropriate hedging to reduce exposure to interest rates and inflation;
- More diversity to reduce substantial reliance on assets sensitive to macroeconomic factors;
- Smarter implementation to find more cost-effective ways to invest; and
- Managing downside risk, which is especially important for plans with negative cash flow.
“Unfortunately, for the next several years, we’re going to see lower growth. . . . We encourage you to adjust to this new world. Step back, take some time, take a look at your plan, look at your objectives and find the kind of strategies that can get you where you need to go in this new environment,” said Kehler. “We think that, as part of that, in this new environment, you need to get your assets working harder. You need to get the most out of everything that you’re doing, and part of that is to think holistically about your plan.”
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During the event, Jeff Kissack, senior consulting actuary at Willis Towers Watson, discussed growing Canada’s annuity market. In 2013, the volume of annuity sales basically doubled in comparison to the previous five years, according to Kissack.
“You remember 2013; that was a really good year for pension plans. Assets were up, discount rates were up at the end of the year, so plans found themselves in the recently unfamiliar territory of having a solid funding position, some plans in surplus. What we saw in 2013 was plan sponsors taking advantage of that and de-risking their plan.”
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The 2013 trends should repeat themselves in 2017, Kissack added. “There should be a big jump up in annuity purchases this year because of the improvement in discount rates and funding positions through the end of 2016. We may even see our first $1-billion annuity transaction, if one of the bigger plans in Canada decides to de-risk.”
He also expect innovation in the annuity market to continue. “If you’re thinking that interest rates are too low, my plan is too unique, my plan is too small to get good pricing, I think you might want to revisit that because we’re finding, and we’re expecting to continue to see, annuity providers being much more open to unique deals,” said Kissack.
“Just because it hasn’t been done in the past doesn’t mean it won’t be done in the future.”
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