The pandemic and its economic impact have challenged Canadian pension plans this year as never before.
By Ed McCarthy
Clive Lipshitz
Clive Lipshitz, Managing Partner with Tradewind Interstate Advisors, is set to discuss this situation for the upcoming CAiP Forum Series Fireside Chat on Nov. 4.
Other experts who will join him for this timely conversation on Canada’s current economic climate and trends impacting its pension system are:
- Keith Ambachtsheer, KPA Advisory Board Services Ltd., and
- Andrew Willis, Business Columnist, Globe and Mail.
Lipshitz recently previewed his thoughts on these themes with CAiP.
How has the pandemic affected Canadian pension plans? And do you believe any of these effects will be permanent? If so, what are the implications?
The impact on portfolios will not be known for a while because of the uncertainty in valuation of private market assets.
In particular, Canadian pension plans allocate about a quarter of their portfolios to real assets, and it is too soon to predict the long-term impact of the pandemic on various real estate and infrastructure asset types.
My personal view is that there’s a tendency to project the present onto the future, and it’s likely that current pessimism with respect to some of these asset types will have been found to be exaggerated.
That said, COVID will affect public sector finances through subdued tax revenues and unbudgeted expenditures. This raises some concern about pension funding.
The Canadian pension plan model, as practiced by the largest plans, is often cited positively by researchers comparing plans globally. Can Canadian plans maintain their top tier ranking? What factors — demographic, environmental, regulatory, etc. — might cause that ranking to change? And what can pension plans be doing to best maintain their operations?
The most predictable input into pension design is demographics and this affects every pension system throughout the world.
There are two primary factors at play — fertility rates and life expectancy. Both are moving in the wrong direction from the perspective of those who design pension systems.
Canada has a fertility rate of 1.5, which isn’t much above that of Japan, for example. Life expectancy is growing by more than a month per year. With advances in medical research, there’s the possibility of a step-function increase in lifespans, which is great for everyone but actuaries.
So long as Canada continues to encourage immigration, it will be able to offset these concerns to some degree. But step back and look at the bigger picture.
While the public pension system and the CPP are very well respected, Canada will have to deal with the “adequacy” concern, in other words, sufficient retirement savings for those not covered by DB plans, particularly to avoid “pension envy.”
Also, as lifespans continue to rise, there need to be policies to encourage workforce participation beyond age 65.
Many larger plans have broadly diversified their portfolios beyond traditional asset classes. How do you see plan portfolios evolving over the next three to five years? For example, will we see more emphasis on ESG, impact investing and the use of private investments?
Historically, distinct asset class definitions made sense as they allowed for evolution of the investment office into departmental units.
Private market investments should no longer be considered “nontraditional” or “alternative” as they’ve been central to portfolio design for 20-plus years at some of the large pensions.
Instead, there is an evolving trend toward a factor-based approach to portfolio construction, particularly as the more established pensions orient toward total portfolio management.
ESG and impact investing will become more central, particularly if recent efforts to unify standards and evidence true portfolio benefits provide more clarity to investors.
Additionally, since the larger Canadian plans are generally fully funded, they focus more on asset-liability matching than do pensions in the U.S., for example.
This has implications for the duration and yield-orientation of their portfolios. There is some risk that outcomes in certain private market asset classes will not meet expectations because capital flows tend to lag behind opportunities and hence investment returns.
