De-risking seems to be the topic du jour for Canadian DB pension plans. But not all pension funds need to take risk off the table—and for those that do, the options are several, no matter what size they are.
“The fundamental question is who should de-risk,” said Don Ezra, co-chairman of global consulting with Russell Investments, speaking at Benefits Canada’s annual Benefits & Pension Summit in Toronto.
According to Ezra, the conditions under which de-risking makes sense include surplus volatility, sticky contributions and benefits, a well-funded status, the plan being closed to new entrants, and lack of access to surplus or a situation where the sponsor owns the surplus downside but not the upside. “If you can put a check mark by lots of them, then gradual de-risking starts to make sense,” Ezra said.
When to de-risk
The time for pension funds to de-risk is when their funded status improves and they get close to full funding. But “the funded status has been pretty volatile for the last dozen of years or so,” noted Ken Choi, senior consultant with Towers Watson’s investment practice, speaking during the same conference session. This means that sponsors need to grab de-risking opportunities as they arise because they won’t last forever, he explained.
How to de-risk
“There are many levers that you can push and pull in your management of DB risk,” Choi said. “For those of you who are just embarking on the de-risking journey, leave no stone unturned.”
Accodring to Ezra, some de-risking strategies include lengthening fixed income duration, increasing exposure to fixed income, using derivatives to increase interest rate and inflation sensitivities, and buying annuities.
To make these strategies work, plan sponsors could benefit from hiring a third party and then delegating to it all the details associated with risk management, Ezra explained.
“If you’re a large fund, you can afford to hire all the people,” he said, adding that if the fund is smaller and, therefore, with a leaner budget, it can hire the third party on a part-time basis.
When de-risking, it is also crucial for pension funds to avoid the bad risk and the risk they don’t understand and to ensure that the risk they do take will pay off and lead to higher returns in the future, Choi explained.
But while de-risking is top of mind for many pension funds in Canada, the country has yet to catch up with other nations, Choi said. “In Canada, there really hasn’t been the level of activity” that has been observed in the U.S. and the U.K.
All the articles from the event can be found on our special section: 2014 Benefits & Pension Summit Coverage.