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Canadian Pension Assets Top $1 Trillion

Date: Wednesday, February 28, 2007
Author: Joan Weber, Risk Center

Assets under management by Canadian pension funds topped the $1 trillion mark for the first time in 2006 thanks in large part to the recent strong performance of domestic and global equity markets.

The results of Greenwich Associates’ 2006 Canadian Investment Management Research Study reveal that strong investment returns have helped Canadian pension plan sponsors maintain funding ratios at a relatively robust 97% for the past two years. While these results suggest that Canadian pensions are in better financial health than those in other developed countries, it is important to bear in mind that the overall average encompasses pension plans with considerable variation in funding level — including several large public and corporate pension funds that are significantly under-funded.

At the same time, it can be argued that Canadian pension funds as a whole are actually in much better shape than average funding levels would suggest. Funding ratios among Canadian corporate pension plans averaged 99% in 2006 and public and provincial plans averaged 100% funded. “It is only among the Canadian subsidiaries of U.S. companies that average funding rates drop to 92%,” said Greenwich Associates’ Toronto-based consultant Lea Hansen

Plan Sponsors Preserve Defined Benefit Pensions

The relatively strong financial condition of Canadian pension plans reflects the commitment of the country’s plan sponsors to their traditional defined benefit structures. While 22% of Canadian DB plans have been closed to new employees, the proportion of Canadian plan sponsors expecting plans to close their plans in the next two to three years declined over the past 12 months, to 2% in 2006 from 3% in 2005. (A similar 22% of DB plans in the United States have been closed to new employees, in contrast to 60% of DB plans in the United Kingdom.) Canadian funds with assets between $101 million and $500 million have the highest closure rates, with 27% of DB plans of this size closed to new employees. Among Canada’s largest pension funds — those with more than $1 billion in plan assets — 14% have been closed to new employees. There was a notable increase in closures among plans with assets of $500 million to $1 billion. In this group, the proportion of closed funds rose to 24% in 2006 from 13% in 2005.

Return Expectations and Asset Allocation

Canadian plan sponsors expect their investment portfolios to generate an annual weighted average return of 6.6% over the next five years. When asked to report mean five-year rate-of-return expectations for various asset classes, Canadian plan sponsors cite the following: 10.1% for private equity (down from 11.1%. in 2005); 8.3% for international (EAFE) equities (down from 8.5%); 8.2% for domestic equities (up from 8.1% in 2005); 8.0% for real estate (from 7.8% in 2005); 7.8% for U.S. equities (down from 8.0% in 2005); 7.0% for hedge funds (down from 7.4% in 2005), and 4.9% for domestic fixed income (down from 5.2% in 2005). “It is interesting to note that expected returns on hedge fund investments are equal to those for U.S. equities and lower than all other asset classes except domestic bonds,” says Greenwich Associates consultant Rodger Smith.

In order to help generate much-needed investment returns, Canadian plan sponsors made several significant alterations to their asset allocations in 2006. Total domestic equities fell to 22.5% of total assets in 2006 from 23.9% in 2005 and allocations to domestic bonds dropped to 31.4% from 32.0%. Meanwhile, allocations to foreign stocks and bonds increased to 29.1% of total assets in 2006 from 25.6% in 2005. Indeed, the most notable change to Canadian plan sponsors’ asset allocations in 2006 was this 3.5% increase in allocations to foreign securities.

Domestic Stock Strength Mitigates Impact of Foreign Property Revision

The increased allocation to foreign securities is evidence of the still unfolding effects of the elimination of foreign property limitations. More than a third of Canadian plan sponsors say they plan to increase allocations to foreign investments. Of these, 37% plan to do so within six months, 28% plan to do so within a year and 31% plan to increase foreign exposure within a three-year window. “Taken together, a significant share of Canadian funds expects to meaningfully increase allocations to foreign securities in the next year,” says Greenwich Associates consultant Lori Crosley. “In all likelihood, that proportion would be much higher were it not for the bull market in Canadian stocks.”

Greenwich Associates is the leading international research-based consulting firm in institutional financial services. Greenwich’s studies provide benefits to the buyers and sellers of financial services in the form of benchmark information on best practices and market intelligence on overall trends. Based in Greenwich, Connecticut, with additional offices in London, Toronto, and Tokyo, the firm offers over 100 research-based consulting programs to more than 250 global financial-services companies. Please contact us for further information or to arrange an interview with one of our consultants. You can visit our website, www.greenwich.com, for more information.