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With the arrival of the new year, there are three topics that will be important for pension plan sponsors, members and other industry stakeholders in 2024.

The economy and financial markets

At the end of 2023, the Canadian economy and the financial markets were still feeling the after-effects of the coronavirus pandemic.

Read: Expert panel: How interest rates impact DB pension plans

Some key questions remain heading into the new year:

  • Is price inflation finally on a path towards returning to the Bank of Canada’s target rate of two per cent over the next couple of years?
  • Since the beginning of 2022, the Bank of Canada has raised its policy interest rate 10 times in order to combat price inflation. Is this tightening cycle nearing its end and could the policy rate even start to decrease in 2024? Also, what are the implications and risks to the Canadian economy if Canadian and U.S. monetary policies diverge in 2024?
  • Will the end result of the Bank of Canada’s actions to reduce inflation be a deep recession or will the Canadian economy be able to pull off a soft landing?
  • Long-term bond yields increased dramatically in 2022 and much of 2023. However, long-term yields decreased meaningfully from the beginning of November to the middle of December 2023. Is the recent drop in yields the beginning of a trend towards lower yields or does it reflect only short-term volatility that will soon be reversed?
  • After a dismal performance in 2022, global equity markets performed well for much of 2023. Will equity markets continue to perform well in 2024 or will they falter, particularly if the Canadian economy and other key economies experience recessions?

Read: Rising bond yields, frontier markets top of mind for institutional investors in 2024: expert

The answers to the above questions will have significant implications for pension stakeholders in 2024, including the purchasing power of retirees’ pension income, the size of balances in capital accumulation plans and the funded status of defined benefit pension plans. It’s important that pension plan sponsors undertake the analyses needed to understand and manage economic and financial market risks, consider monitoring triggers and prepare for dynamic action as circumstances evolve.

Risk management

In June 2023, the Canadian Association of Pension Supervisory Authorities released a draft guideline for pension plan risk management. It outlines a five-step process to assist with risk management: identifying the plan’s objectives, identifying risks, evaluating risks, managing risks and monitoring risks.

The draft guideline also addresses in more detail specific types of risks that may apply to pension plans. Some of the specific types of risks, such as investment risk governance, are well known to pension plan administrators. Other risks addressed in the draft guideline, such as cybersecurity and environmental, social and governance factors, are risks that are emerging with respect to their understanding and importance.

Beyond the draft CAPSA guideline, individual regulators are also issuing guidance on specific pension risks. With increased focus by regulators and other stakeholders on pension risk management, pension plan administrators will be reviewing and updating their risk management practices to align with the CAPSA guideline and other regulatory requirements. Given the many risks faced by pension plans, it will be important for plan administrators to take a holistic approach to risk management and implement practices that align with their plan’s specific circumstances.

Read: CAPSA’s risk management guideline adaptable to changes in cybersecurity, ESG: webinar

Artificial intelligence

The recent proliferation of large language models — deep-learning algorithms that can recognize and generate content from large datasets — has highlighted the major effects that artificial intelligence will likely have on society at large, including the pension industry. The potential benefits of AI for the pension industry are immense, including revolutionizing the retirement services and education available to Canadians of all different walks and stages of life. This technology is also expected to increase the efficiency of certain tasks performed by plan administrators and industry providers.

However, AI also poses risks and challenges for the pension industry, including the increased likelihood of the dissemination of inaccurate and/or confidential information. AI is also expected to reduce the need for certain types of jobs in the industry, while also creating jobs that don’t yet exist.

Although the precise changes that AI will bring to the pension industry and the speed at which these changes will occur are unknown, AI clearly represents a major disruptor. In 2024, the creation and adoption of AI tools for the pension industry will likely increase, with stakeholders attempting to be first adopters of new tools that will provide them with a competitive advantage, while mitigating the risks and pitfalls associated with these new technologies.

Read: How Texas’ Teacher Retirement System is incorporating AI into pension governance