By Rick Baert

Industry leaders highlight four areas of focus for the year ahead, and why they matter.

It won’t be out with the old for Canadian pension plan executives in the new year, as trends impacting plan management in 2019 are expected to continue or grow in 2020, sources said.

Among the trends expected to most impact the industry this year are:

  • Continuing opportunities for long-range pension planning as strong investment returns in 2019 improved funding levels for defined benefit plans in the new year;
  • Additional provinces allowing pension plan fund accounting to be based on a going-concern, or ongoing, basis rather than a one-year solvency formula;
  • An enhancement of the trend among direct benefit plan executives in using outsourced chief investment officer platforms or consolidating their plans; and
  • An increase in the use of defined contribution or hybrid plan structures like target-benefit funds with both DB and DC elements.

Pension plan executives will do some “expectation management” in 2020, said Scott MacDonald, director, investments, at Willis Towers Watson PLC in Toronto. “Every asset class has had a long bull run, a 10-year bull run, so they might think every decision they made was perfect,” MacDonald said. “But 2019 wasn’t a normal year. What [pension executives] need to do is look for diversity in their portfolio, so that they can stay robust no matter what happens.”

Jana Steele, partner, pension and benefits, at the law firm of Osler Hoskin & Harcourt LLC in Toronto, said the trends toward hybrid plan structures and going-concern funding rules will continue not only for the coming year but for the foreseeable future, driven more by efforts to keep retirement plans “more sustainable.”

“There’s a lot of pressure to do this,” said Steele. “Changes in accounting rules have made it more difficult for pension plan sponsors. Hybrid plan structures and going-concern accounting have made it more attractive for plan sponsors to keep their retirement plans.”

The improved solvency of Canadian defined benefit plans last year — to a median range of 98% to 102.5% as of Dec. 31, from 93% to 95.3% a year earlier, according to Aon and Mercer Canada data — “has freed up [pension fund] clients to have strategic consultations that they haven’t had in a while,” MacDonald said. 

“A lot of plans that are now 90% to 100% funded can take a look at whether they want to take risk off the table, add risk if they’re looking more long term, or make the move to defined contribution. There will be a lot more discussions like this in 2020,” he added.

Another derisking trend in 2020 will be to protect plan sponsors that would like to use annuity buyouts for their pension obligations from “boomerang risk” — the risk of being responsible for those obligations if the insurer that manages the annuity declares bankruptcy, according to Osler Hoskin’s Steele. Ontario passed such legislation in 2019, joining British Columbia, Quebec and Nova Scotia. “Other provinces will be considering similar bills in the future,” she said.

In addition, there should be greater interest among DB plan leaders in using external providers to not only manage their investments but also to execute a plan’s overall investment strategy and asset allocation, MacDonald explained: “Most investment committees aren’t equipped to do [an allocation change or asset manager selection] on their own. That’s why OCIO has and will continue to have tremendous traction.” (Willis Towers Watson offers an OCIO platform.)

Along with investment outsourcing, more DB plan sponsors will consider consolidation with jointly sponsored pension plans like the Colleges of Applied Arts and Technology Pension Plan, Toronto, according to Steele. CAAT has added 14 pension plans to its DBplus program, in which CAAT pools the investments of member plans. “People are seeing the pooling of assets as a more efficient way of maintaining their defined benefit plan,” she said.

Rick Baert is a freelance journalist who specializes in covering institutional money management, trading and asset servicing. He is a retired editor and reporter with 42 years of experience with financial, business and daily news services. Rick has covered the Canadian pension fund industry for the past six years.