In a difficult economic environment, Canadian pension plan sponsors are willing to sacrifice higher returns for stability.

The U.S. credit crunch and resulting market uncertainty is taking its toll on pension plans. A recent global poll conducted by SEI indicates that the majority of Canadian plan sponsors favour controlling volatility over increasing returns. In fact, risk avoidance and volatility control are among their top priorities.

Performed by the Pension Management Research Panel, the poll questioned executives from five countries—Canada, Hong Kong, the Netherlands, the U.K. and the U.S.—about how they felt the industry was performing based on current market conditions. A total of 305 executives participated, with plan assets ranging from US$30 million to more than US$5 billion.

For comparative purposes, the same poll was conducted on two occasions: in June 2007, just prior to the credit crisis and again in the second quarter of 2008, to measure how the market conditions following the credit crisis have changed plan sponsors’ attitudes and opinions.

Mission: Control

The 2008 results indicate that pension plan sponsors are prepared to sacrifice potential returns if it means avoiding large swings in capital markets, which may hinder the abilities of plan sponsors and financial executives to focus on improving the bottom line of their pension investments. In the results, Canada was second only to the U.S., with 62% favouring volatility control over increasing returns compared to 68% in the U.S.

Funding levels have also changed significantly. In 2008, two-thirds of global respondents stated that their plan’s funding level was above 90%, versus more than three-quarters in 2007. The number of plans with funding levels below a critical 80% threshold has also increased.

Plan sponsors and financial executives understand that pensions represent a large liability for an organization. The ability to maintain a well-funded pension allows a company’s treasury function to plan and optimize cash flow, as well as overall budgeting, more effectively. Simply put, having a better funded pension plan means spending less time worrying about the impact of the plan on corporate finance.

Consequently, plan governance and risk management have taken on a new significance for pension plan sponsors. More than half (53%) of those polled globally said that monitoring the risk of plan investments has increased in complexity, up from 41% last year.

Role Call

Plan sponsors face a number of issues as their roles and responsibilities increase, including greater governance complexity and the challenge to keep funding at acceptable levels. The recent market instability makes these responsibilities even more challenging.

Interestingly, on questions relating to pension plan management, the results found a disparity between the responses of those in different company roles. For example, 37% of all chief financial officers (CFOs) or treasurers said that evaluating the performance of investment managers is more of a challenge than it used to be, while only 2% of pension managers said the same. This finding suggests that not having a full-time employee dedicated to the role of investment management performance evaluation means that the burden falls to those who may not be able to dedicate the proper time required to this task.

New Management Models

The SEI research results suggest that plan sponsors have an eye on the future volatility of capital markets and are willing to adjust their strategies to increase the stability of their pension investments, even if this means potentially lower returns. And managing volatility is more difficult without a dedicated person or team in place.

Consequently, organizations are investigating different models for the financial and fiduciary management of pension plans, particularly when this responsibility falls to the CFO. Pension plan managers, too, need to acknowledge the complexity of plan governance and the importance of mitigating pension investment risk during difficult times.

Andrew Kitchen is managing director, strategies and solutions, with SEI in Toronto.

> click here for a PDF version of this article

© Copyright 2008 Rogers Publishing Ltd. This article first appeared in the September 2008 edition of BENEFITS CANADA magazine.


Copyright © 2020 Transcontinental Media G.P. This article first appeared in Benefits Canada.

Join us on Twitter