After a “Goldlilocks period” of low inflation and economic stability in the 2010s, the coming decades are expected to be marked by a higher cost of living and broader economic turbulence.
Defined contribution plan members’ portfolios need to be “structured for this new reality,” said Nicole Lomax, vice-president, director and lead of institutional asset allocation at TD Asset Management Inc., during a session at Benefits Canada’s 2025 DC Investment Forum.
“Expect that two per cent [inflation, the Bank of Canada’s target] is going to be the floor rather than the ceiling going forward. Private alternatives is an asset class that’s definitely geared for this type of environment.”
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She identified four economic states: high inflation, high growth; low inflation, low growth; high inflation, low growth; and the much more anomalous low inflation, high growth scenario that characterized the 2010s. In the other three more unstable economic environments, she said, alternatives “really thrive,” because they’re a much more effective inflation hedge than other asset classes.
“The reason these asset classes do such a good job at hedging inflation is that the inputs that go into their returns are directly linked to the sources of inflation.”
As an example, Lomax described a solar farm that generates revenue through power purchase agreements, a long-term contract between the farm and the end power user, which often have “escalator” clauses linked to the consumer price index.
Private alternatives can help both grow and preserve capital, she said. A target-date fund that included alternatives would have given a plan member who retired in 2015 and had a static eight per cent withdrawal rate 1.4 times more capital over a 10-year period than a fund invested in the public markets only, according to a TDAM analysis.
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Lomax acknowledged the liquidity of alternatives can be an issue, but said DC plan sponsors can mitigate it with three mechanisms. She recommended using stress testing to identify an alternative allocation that gives members adequate diversification benefits without locking up too much of their portfolio. Illiquidity can also be managed by forecasting plan members’ cash flows and harnessing the income from private alternative investments and managing redemptions.
Following valuation best practices will provide DC plan members with a more clear understanding of their holdings, she added, noting the industry gold standard is for assets to be valued at least quarterly and pooled funds at least monthly by accredited third-party appraisers.
Read more coverage of the 2025 DC Investment Forum here.