As a new year dawns, our attention turns to what’s ahead, the following are a few of my predictions for trends in the world of pensions in 2022.
We’re entering the year in an environment of considerable economic and financial market uncertainty. Supply chain problems, elevated price inflation and labour shortages in certain industries are just a few of the economic challenges that Canada and many other economies are facing.
The recent equity market volatility caused by the discovery of the new Omicron coronavirus variant serves as a reminder of how quickly market sentiment can change. New plan member demographic trends may emerge and the Canadian Institute of Actuaries is in the process of reviewing current levels of and future expectations of improvement to mortality, which may affect defined benefit pension liabilities.
Read: Majority of global institutional investors expect interest rates to rise in 2022: survey
Periods of volatility will likely continue in 2022. To ensure they’re in the best position to face any volatility that occurs over this new year, it’s important that DB pension plan sponsors have clear risk management objectives; closely monitor the pension financial metrics that matter most to them; and are willing and able to act quickly and decisively when risk management opportunities emerge.
The decumulation landscape for capital accumulation plans will continue to evolve in 2022, building on significant developments in 2021.
The federal government enacted tax rules this year that permit the establishment of a variable payment life annuity fund within a registered defined contribution pension plan or within a pooled registered pension plan. Plan members who opt for the VPLA option upon retirement will receive a monthly pension payable for their lifetime. The retiree’s monthly pension amount will be adjusted periodically to reflect the mortality and investment experience of the fund. This will enable retirees to pool their longevity and investment risk with other retirees within the plan.
Read: 2021 DC Plan Summit: What legal issues are facing DC plan sponsors?
To implement VPLAs, the key next steps are amendments to pension standards legislation to permit VPLA funds. It’s encouraging that the Canadian Association of Pension Supervisory Authorities has established a decumulation committee, which will develop and recommend a pension standards legislation framework for VPLAs that is harmonized across jurisdictions.
Also, momentum will likely build to expand access to products that pool longevity risk to assets that have accumulated in additional types of savings vehicles such as registered retirement savings plans.
There will be an increased focus on considering environmental, social and governance factors in the investment of pension plan assets. This includes efforts to improve the processes and metrics used to measure how well investment managers are reducing ESG risks within their funds.
Read: More standards required for pension funds using ESG data, indices and scores
The pandemic, which has impacted Canadians’ lives in so many ways, has highlighted the inextricable link between a person’s financial, mental, physical and social health. In 2022, there’s likely to be continued momentum toward a more holistic view of savings and retirement programs as a key component of an employer’s various offerings aimed at improving both the financial and emotional well-being of employees.
Of course, I can’t be sure that the above predictions will have proven to be correct until I look back a year from now. However, I can predict with certainty that 2022 will be an interesting year in the world of pensions.