The funding status and confidence of Canadian defined benefit pension plans declined in 2020 amid the coronavirus pandemic and a low interest-rate environment, according to a new survey from RBC Investor & Treasury Services.
It found among 122 respondents, 50 per cent reported their plans were fully funded on a going-concern basis, down significantly from 66 per cent in 2019. Nearly two-thirds (62 per cent) of large plans were fully funded, compared to 55 per cent of small plans and 31 per cent of mid-sized plans.
Confidence in meeting liabilities also declined from 4.4. to four on a scale of one to five, but remained higher than 2017 (3.7) and 2018 (3.8). Confidence was highest among large plans (4.3) and lowest among public plans (3.8). Low interest rates were considered the biggest challenge by respondents (26 per cent, up from 20 per cent in 2019), followed by “economic and geopolitical uncertainty” and “market volatility” (each at 13 per cent).
However, the survey noted pension plans’ returns bounced back after the first quarter of 2020, with positive quarterly returns for the remainder of the year at approximately 10 per cent, three per cent and five per cent, respectively, with an annual return of more than nine per cent.
And while most pension plans identified reassessment of asset management strategy (29 per cent) and higher member and/or employer contributions (26 per cent) as their top responses to the pandemic, large plans indicated strategy reassessment (41 per cent) and an increased focus on responsible investment (19 per cent).
The survey also found 96 per cent of large plans (characterized as those with more than $5 billion in assets) and 73 per cent of plans overall either held alternatives or intended to add them within the next 12 months.
While pension plans with alternative investments were most likely to include real estate and infrastructure in their portfolios (at 96 per cent and 85 per cent, respectively), demand for real estate is expected to decline as fewer plans (45 per cent, down from 53 per cent in 2019) augment their holdings and a higher proportion (seven per cent, up from zero per cent) look to decrease their allocations to this asset class, due to the increase of remote working.
Many respondents also planned to increase their allocations to private equity (47 per cent, up from 38 per cent) and private debt (46 per cent, up from 38 per cent). Alternatives were also the second most popular method of de-risking at 23 per cent, behind liability-driven investments at 26 per cent and significantly ahead of buy-out annuities at 12 per cent.
And 53 per cent of respondents perceived socially-responsible investments to be important to their overall strategy, up from 43 per cent in 2019.