Falling asset values and low interest rates conspired to pull down the average funding ratio of Canadian pension funds in 2009, according to research by Greenwich Associates.

The consulting firm notes that funding ratios declined to an average of 90% in 2009 from 99% in 2008, partly due to a 17% year-to-year reduction in asset values. Funding levels at corporate funds fell from 102% in 2008 to 89% in 2009, while funding levels for public sector/provincial plans decreased to 90% from 95%.

On the defensive
Greenwich portrays a Canadian pension fund universe that adopted an increasingly conservative strategy during the dark days of late 2008 and 2009, with institutional allocations to domestic equity falling to 16.7% of total assets in 2009 from 18.7% in 2008. Simultaneously, fixed-income allocations increased to 36% of assets from 30.8%.

Public sector pension funds took a more aggressive approach than their corporate peers, with lower allocations to fixed income and higher allocations to alternatives. Public funds had allocations of 5.8% of total assets to private equity in 2009, compared to allocations of only 0.7% among corporate funds. Public funds also had higher allocations to real estate, hedge funds and infrastructure.

Forty percent of Canadian plan sponsors indicated in 2009 that substantive changes lay ahead in their asset mixes, up from 31% the prior year. Such changes, if implemented, will result in further reductions to domestic equity allocations. Seventeen percent of funds plan to significantly reduce allocations to actively managed Canadian stocks, while only 5% plan to increase them. According to Greenwich, the lion’s share of the cash moved out of domestic equities will be invested in alternative asset classes.

Branching out
The firm also discovered that the global financial crisis did not prevent Canadian pension funds from expanding their portfolios of international equities, with 76% of Canadian institutions using a manager for EAFE/international equities in 2009, up from 68% in 2008. The number of funds using U.S. equities also increased to 72% from 69%.

“Although there is no strong trend toward intended significant increases in allocations among institutions that already invest in international equities, 6% of Canadian funds as a whole say they plan to hire a manager for EAFE/international equities, the highest share reported for any traditional asset class in 2009,” says Greenwich Associates consultant Dev Clifford.

Alternative investments are getting increased attention from Canadian institutions, with allocations to private equity, hedge funds and infrastructure on the rise. Though real estate allocations remained steady at 36%, 8% of funds say they plan to hire a real estate manager in the next 12 months. Twelve percent are planning to hire a manager for infrastructure, while 4% plan to hire for both hedge funds and private equity.

Copyright © 2020 Transcontinental Media G.P. Originally published on benefitscanada.com

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