Favourable market conditions from mid-2010 to roughly the same point in 2011 helped increase the value of assets managed by Canadian pension funds, endowments and foundations by approximately 10%, reports Greenwich Associates. However, despite relatively strong asset growth, pension plan sponsors made little progress in boosting depressed funding levels.
According to Greenwich’s 2011 Canadian Investment Management Study, funding ratios among Canadian public pension funds notched a modest recovery last year, increasing to 91% in 2011 from 88% in 2010, while average funding ratios among corporate plans were flat year to year at 90%. Despite an 18% recovery in the value of assets under management since 2009, these funding levels remain far below their pre-crisis highs: funding levels for Canadian public pension funds peaked at 100% in 2006; corporate pension funding levels peaked at 102% in 2008.
As a share of total portfolio assets, Canadian institutions’ allocations to domestic equities are roughly half what they were a decade ago. In 2003, Canadian equities made up 27% of institutional assets. By 2011, that share had fallen to just 15%. About one-third of Canadian institutions expect to significantly decrease allocations to active Canadian equities over the next three years, and 13% plan sizable decreases to passive domestic equity allocations. Only 2% expect to meaningfully increase allocations to active domestic stocks, and 4% plan to boost allocations to passive Canadian equities.
Canadian institutions cut their expected rates of return on nearly all major asset classes last year. Mean annual rate-of-return assumptions for the next five years dropped to 7.3% in 2011 from 7.7% in 2010 for Canadian equities and declined to 4.1% from 4.5% for fixed income. Expected returns on international equities fell to 7.4% from 7.8%. Institutions also reduced expectations for alternative asset classes.
Reflecting their inability to make much headway in restoring funding levels, Canadian institutions are exploring new approaches to portfolio management, including basic asset-liability matching techniques and liability driven investment (LDI) strategies. Approximately 35% of Canadian institutions have moved to increase the duration of their fixed income investments, and about one in every five institutions and one-quarter of corporate plan sponsors have implemented LDI strategies.