While real assets are largely absent among the investment options offered by Canadian defined contribution pension plans, they can offer significant long-term benefits to plan members, said Andrew Knox, managing director of Franklin Templeton Investments’ global real assets fund, during a session at Benefits Canada’s 2024 DC Plan Summit in February.
“[Defined contribution] investors in Canada tend to be limited to stocks and bonds. [Real assets] tend to have different reactions to different drivers in the economy and they tend to be uncorrelated to those larger stock and bond mechanisms.”
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He cited the investments in infrastructure, utilities and natural resources by Canada’s large defined benefit pension plans—including the British Columbia Investment Management Corp., the Canada Pension Plan Investment Board, the Caisse de dépôt et placement du Québec, the Ontario Municipal Employees’ Retirement System and the Saskatchewan Healthcare Employees’ Pension Plan — as examples of plans that have benefited from real assets. These investments have proven their worth by growing in value alongside rising inflation, said Knox.
“[The large DB pension plans] all have had significant weights to real assets in their portfolio for an extended period of time. [These plans] are widely regarded to be the most successful and enthusiastic investors in real assets and that’s a large driver of why they have remained so well funded during the volatility that we’ve seen over the last 20 years or so.”
Allocations to real assets are increasing among Canada’s larger DC pension plans, particularly those that have a large control over the existing assets in their portfolio. Notably, the University of British Columbia’s pension plan is weighted 17 per cent to real assets in its balanced fund.
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However, challenges remain for DC plan sponsors looking to add real assets to their investment options. “Some of [the challenges] are philosophical in terms of what a plan sponsor needs to do to be able to understand what the right choice is for [plan members]. The second question is what technology can allow you or your record keeper to do in the portfolio.”
There’s also the matter of risk tolerance for both the plan sponsor and members. “All of the choices that you make in this space will be active investments. You typically will have a smaller number of assets, smaller than you would have in a stock or a bond portfolio, so concentration risk’s an issue. ‘How much risk are you willing to accept or take out of your portfolio?’ is another question and it’s important to recognize that risk isn’t just volatility. . . . Liquidity is a very important component of this — when you’re dealing within [the DC plan space] you need to make sure [plan members] have access to that capital.”
Read more coverage of the 2024 DC Plan Summit.