DB plans healthy and wealthy: CPF study

November 8, 2007 | Last updated on November 8, 2007
3 min read

The death of the defined benefit pension plan has been greatly exaggerated. In fact, Canadian corporations that still provide such benefits are seeking the means to shore them up, according to a study by the Canadian Pension Fund Directory (CPF).

The survey of 157 corporate and public plans, representing $630 billion in assets, was sponsored by Pyramis Global Advisors, the institutional arm of Fidelity Investments. Of the DB plans that are currently open, 87% affirmed their commitment.

“Canadian pension funds have come a long way in a very short time and are well positioned for the future,” said Michael Barnett, executive vice-president, Fidelity Investments ULC. “Less than 10 years ago many pension funds were over-exposed to the equity markets and suffered when the markets declined in the early part of this decade.”

The study found that pension fund administrators are now looking to reduce their exposure to Canadian equities, taking profits from a market that has provided phenomenal returns over the past five years.

Global equity markets are seen as a viable alternative, as the broader diversification can help level out returns. Alternative investment strategies — such as the 130/30 system — are increasingly popular. Under a 130/30 investment mandate, the manager uses leverage to gain 130% exposure to a given market on the long side, while employing a 30% short selling program.

In the two years since the Foreign Property Rule, which limited pensions’ foreign holdings to 30%, was eliminated, plan administrators have remained relatively overweight in Canadian equities, which make up 45% of assets, on average.

Fixed income makes up 34% of the average portfolio, while international and U.S. equity allocations are both at 12%. Global equity allocations average 7%.

Sponsors of DB plans remain committed to the benefit, as it is regarded as an excellent tool to attract and retain talent. Of the plan sponsors in the survey, 87% affirmed their commitment for at least the next five to 10 years. Among public plans, the affirmation was 100%.

“The focus on containing costs and managing risk indicates a strong focus on ensuring the long-term sustainability of these funds,” says Barnett. Near-term market volatility ranked only third on the list of concerns.

“Contrary to many existing perceptions, our research shows that Canadian pension funds are well funded, solvent and maintain the powerful retirement benefits of defined benefit plans for their members,” Barnett says.

In addition, Canadian plans are more diligent in their funding than their American counterparts, says Peter Chiappinelli, Boston-based senior vice- president of investment strategy and asset allocation at Pyramis.

Chiappinelli says Canadians should count themselves lucky to have pension funding levels that are averaging 100% or more. “The U.S funds are ecstatic to be at 90.5%,” he notes.

While there is always a home bias, Canada’s is considerably large, Chiappinelli notes. In U.S. plans, for example, 73% of equity holdings are in U.S. equities, whereas U.S. equities represent 48% of the MCSI World Index. Canada’s 45% equity allocation is in proportion to 4% of the MCSI World Index.

However, among the large plans, this is changing. Seventy-five per cent of Canada’s large plans are seriously considering or are in the process of decreasing their Canadian holdings. Chiappinelli says public plans dominate the large plan space in Canada but 81% are considering or in the process of reducing Canadian equities.

Chiappinelli also says that Canada’s large plans are moving up to 47% of their Canadian equity holdings into other asset classes.

Filed by Steven Lamb and Mark Noble, Advisor.ca, steven.lamb@advisor.rogers.com, mark.noble@advisor.rogers.com