We brought together senior representatives from money management firms in a “virtual round table” to discuss the issues facing Canada’s largest pension asset managers.
- Roger Beauchemin, president and chief executive officer, McLean Budden
- Benoît Durocher, executive vice-president and chief economic strategist, Addenda Capital
- Peter Lindley, head of investments, State Street Global Advisors (Canada)
- Rajiv Silgardo, chief executive officer, Barclays Global Investors Canada
- Perry Teperson, vice-president, Leith Wheeler
- Rob Vanderhooft, chief investment officer, Greystone Managed Investments
- Damon Williams, head of institutional portfolio management, Phillips, Hager & North
What impact has the credit crisis had on large Canadian institutional money managers, and what will be the long-term implications for the management of pension assets?
Perry Teperson: The crisis has had a material impact on the funded positions of our industry’s largest clients, the defined benefit (DB) pension funds. It has also been a wake-up call that the worst-case expectations may be met.
Longer term, I expect to see less risk-taking in bond portfolios and more of an examination of the merits of alternative investments. People should also become more wary of the new alternative product that offers them higher returns with less risk. Hedge funds promised investors a smoother ride than equities, yet many hedge funds this year have blown up on bets that commodities would continue to rise.
Rajiv Silgardo: I agree that the funded positions of all DB pension funds have eroded significantly over the last few months. This is going to lead to a serious rethink of how pension monies are invested today.
Essentially by focusing solely on the asset side of the equation and by largely ignoring liabilities, pension plans are creating a lot of volatility in their funded positions. This volatility not only adversely impacts the plan’s beneficiaries but ultimately also the sponsor.
I believe that plans will start considering their liabilities much more carefully in the future, and will look to design and implement asset portfolios that correlate more closely with those liabilities. Canada’s asset management industry will need to be ready to provide robust solutions that accomplish that while providing the required returns.
Roger Beauchemin: The fundamental issues at the root of the credit and solvency crisis we have been seeing play out with such brutal force in the past few months are the same that we discussed last year, when the most visible casualty was the asset-backed commercial paper mess. And a lot of us then were apprehensive about what could and would follow.
The de-risking and de-leveraging that we have seen, and continue to see, has been astonishing. The effect on pension assets has been severe, and central banks are still trying to put trust back in the financial system. Can it happen again? Yes, and it likely will, in time.
The long-term implications for the management of pension assets would likely include a fundamental focus on risk, far less tolerance for opacity, complexity and leverage, and a better appreciation of full market and business cycles. There will continue to be innovation, but there will also be a return to basics and fundamentals, a longer-term approach and discipline. And I agree with Rajiv that plan sponsors will likely place significantly more focus on the liability side of the ledger.