A 9% increase in portfolio asset valuations over the past 12 months was not enough to improve the funding ratios of Canadian defined benefit (DB) pension plans, according to the results of Greenwich Associates' latest Canadian Investment Management Study.
Canadian pension plans in 2010 report an overall average funding ratio of 90% — flat from 2009 levels and down significantly from the 99% average funding ratios reported in 2007 and 2008. However, the funding situation for Canadian pension funds is actually considerably worse than those average ratios might suggest. The reason: Canadian pension plan sponsors are not required to revalue their funds every year.
Only about 60% of Canadian corporate pension funds and one-third of public funds have conducted a revaluation in the past 12 months. Among these plans, funding ratios average 88%. Among funds that conducted a plan revaluation within the last one-to-two years, average funding ratios are 87%.
"The national average is being inflated by a sizable group of pension plan sponsors — approximately 15% — that have not revalued their plans within the past two years," explains Greenwich Associates consultant Dev Clifford. "This group still reports average funding ratios of 100%."
Institutions Get Back to Diversification; Plan Increase to Alternative Investments
Allocations to domestic stocks notched a modest increase to 17% of total Canadian institutional assets in 2010 from 16% in 2009, according to the results of the most recent Greenwich Associates Canadian Investment Management Study. But when asked about future changes to target allocations, the number of institutions reporting plans to cut allocations outnumbered those planning to increase by more than 10-to-one in active domestic stocks and by three-to-one in passive Canadian equities.
"Overall, the results of the study suggest that allocation patterns will revert to the longer term trend of institutions reducing their exposure to domestic equities and increasing allocations to alternative asset classes, while shifting international equities to less constrained and more global-oriented mandates and diversifying their fixed-income holdings," says Greenwich Associates consultant Andrew McCollum.
Allocations to fixed income dropped to 33% of institutional assets in 2010 from 35% in 2009 — a decline that likely reflects both market effect and rebalancing on the part of plan sponsors. "Within their fixed-income portfolios, Canadian institutions are actively working to diversify," explains Dev Clifford. "The study results show a pickup in the usage of corporate/credit bonds, long duration bonds and international mandates."
In non-Canadian equities, the study results reveal a clear shift in approach. The share of institutions reporting the use of an external manager for an EAFE or international equity mandate has fallen to 65% in 2010 from 76% in 2009, and the share using a manager for a U.S. equity mandate has declined to 64% from 72%. Meanwhile, the share of institutions reporting the use of a manager for a global equity mandate increased to 37% in 2010 from 28% in 2009, and the share using a manager for an emerging markets mandate increased to 16% from 12%.
Looking ahead, institutions appear to be planning significant increases in allocation to alterative asset classes including infrastructure, real estate and private equity. From 2009 to 2010 allocations to alternatives were relatively stable, with a modest increase to private equity investment and a modest decrease to real estate. But nearly a third of institutions plan to increase target allocations to infrastructure over the next three years; not a single institution participating in the study reported plans to cut allocations to infrastructure. Twenty-eight percent of institutions expect to increase target allocations to real estate, with only 4% planning reductions, and 21% expect to increase target allocations to private equity, with only 3% planning cuts.