What do historically low interest rates mean for DB pension de-risking?

Climate and cybersecurity are the leading risk factors concerning Canadian pension plan administrators, according to a pension lawyer.

Susan G. Seller, a pension and benefits lawyer at Bennett Jones LLP, adds third-party arrangements and commercial real estate risks round out the most pressing categories for federally regulated pension plans. “We’re living in a time where there are many risks. . . . The whole point of adopting this risk-based supervision is so that [the Office of the Superintendent of Financial Institutions has] a framework for expanding their supervision of risks and risk factors.”

Read: ACPM cautions OSFI against one-size-fits-all approach to risk management

According to the OSFI’s 2023/24 annual risk outlook, the impact of climate risk on federally regulated pension plans is evolving since it involves both a physical consideration for any meaningful climate change effects and transition risks in the pursuit of a low carbon economy.

Seller says climate risks also contain environmental, social and governance considerations that the OSFI has identified as impacting federally regulated plans. “The climate risk is such an integral part of the investment risk analysis.”

Cybersecurity risks deal with attacks that could jeopardize financial results or the breaching of sensitive information. According to the outlook, the OSFI will release new guidance related to cybersecurity risk in the form of a reporting tool for plan administrators to submit precise details of any incident.

“Our aim is to identify financial system risks and take action to mitigate them in order to contribute to Canadians’ confidence in our financial system,” said Peter Routledge, superintendent of financial institutions, in a press release.

Read: No need for separate OSFI culture risk management guideline, says CIA

The OSFI’s inclusion of real estate risk is a direct result of the ongoing uncertainty in a high interest rate landscape. According to the regulator, the riskiest commercial real estate categories are office, construction and development, but all commercial property types are facing increased risk due to a period of higher interest rates over the past 18 months.

The outlook said federally regulated pension plans can expect future requests for information from the from the OSFI around the state of issues they’re facing as commercial real estate lenders.

“The outlook remains difficult as seen through an increasing number of strategic defaults in the office space, falling real estate investment trust values relative to their historical net asset value estimates and rising U.S. commercial mortgage-backed securities delinquency and special servicing rates, especially in the office segment,” said the report.

Read: PIAC urges flexibility in OSFI’s pension investment risk guidelines