Pension sustainability to remain a top issue

The sufficiency and sustainability of Canadian retirement plans will continue to be a hot topic for pension pundits in 2014, according to Towers Watson.

However, the firm predicts the new year will mark the start of meaningful change as employers and policy-makers alike move from talk about mitigating risks for plan sponsors and members—to taking action on pension issues.

For corporate DB plan sponsors, a compelling desire for lower and less volatile employer costs will continue to drive plan design change in 2014.

Towers Watson’s 2013 Pension Risk Survey shows that this will first and foremost include change to investment strategy, with a shift away from equities into fixed income, cash or alternative asset classes.

However, with many pension plans having benefited from recent increases in long bond yields coupled with rising capital markets, some plan sponsors will begin to change their management approach, moving away from a prior focus on adjusting plan risk to the right level, to taking material steps to remove some risk entirely through liability settlements with plan members via lump sum payments and annuity purchases.

This trend will see Canada move closer to the U.S. experience of private sector pension plan de-risking.

For DB sponsors that remain committed to keeping their plans operational, more dynamic approaches to investment governance and portfolio management will likely develop.

As plan governance and, in particular, investment strategies and implementation become more complex, greater use of full and partial delegation of the investment process will occur—replicating another trend from European and American experience.

Towers Watson says this development will especially benefit smaller and mid-size plans, for which high fees and access to better managers, strategies and funds have been barriers.