TORONTO, June 28, 2011 /CNW/ - RBC Dexia Investor Services said today
that 84 per cent of defined benefit plan sponsors are concerned about
the threat of inflation and the potential impact it can have on plan
assets. RBC Dexia's latest survey of Canadian pension plan sponsors
also found that the largest plans are increasing their allocations to
infrastructure assets and other alternatives to act as natural hedge
against inflationary pressure and to take advantage of this growing
"The threat of inflation is not just a concern of the every day
consumer, but it is front and centre in the minds of Canadian pension
plan sponsors," said Scott MacDonald, Head, Pensions, Insurance,
Financial Institutions Product for RBC Dexia. "It's also particularly
interesting to note the disparity between public and private plans,
both in identifying what risks are most relevant and the differences in
asset allocation strategies."
The threat of inflation
Momentum and performance in Canadian markets has been strong over the
last several months but inflation speculation, combined with the
ongoing low interest rate environment and a strong Canadian dollar, is
generating some unease.
When asked to indicate their level of concern about the threat of
inflation and the impact on plan assets, 84 per cent of plan members
reported some degree of concern (ranging from extremely concerned to
somewhat concerned), whereas only a small population, 16%, indicated
they were not concerned at all.
Mitigating the risk
It is clear that inflationary concerns are pressing and Canadian pension
plans are assessing their portfolio structures in an effort to guard
against this possible threat. With the level of concern mounting,
managers were asked to describe the measures and strategies they were
taking, or contemplating, to mitigate against inflationary trends. The
tactics varied, but several trends emerged. The first and most
frequently cited approach was the use of real return bonds (RRBs) in
portfolios—seen as a sound strategy to better match indexed pensions.
The inflation risk is transferred to the issuer, but the higher price
represents the 'risk premium'. Several respondents confirmed their
allocations to this asset class and the range extended from 15% to 35%
of their total portfolios.
What's hot and what's not
Respondents were asked to forecast how they expect to change their
allocation strategies in the next six months to a year. Alternatives
came out on top with 21 per cent of respondents looking to increase
their allocation. And it's certainly where the large plans are headed
with 46 per cent of the 'over a billion' club set to increase
investment in alternatives. On the other hand, 26 per cent of private
plans have no allocation to that segment.
Increases in other asset classes include 19 per cent of respondents
bumping up emerging market equity positions, 17% increasing bonds in
developed markets, 9 per cent growing emerging market bond holdings
followed by only 7 per cent of respondents that expect to increase
positions in developed market equities.
Funding status improving
Our survey reports that 85 per cent of respondents confirm that their
funded status ranged from 80 per cent to100 per cent. Moreover, 6 per
cent of our respondents' funded status exceeded 100 per cent.
Percentage of survey respondents
50% to 69%
70% to 79%
80% to 89%
90% to 95%
96% to 100%
22% (largely private plans)
Pensions in the news
The status and viability of pension plans has featured heavily in the
news in Canada over the past year, with changes to federal pension
solvency funding rules and investment limits and provincial funding
relief options also attracting coverage, not to mention a surge of
interest during the recent federal election campaign.
Respondents commented on their plans communication efforts on two
fronts. First, they were asked if the plans had adjusted their
communications strategies with plan members to meet increasing demands
for information transparency. For the majority of respondents, 58%, no
changes were necessary. But for 42% of respondents, new approaches were
put in place.
Second, respondents were asked specifically about whether the plans had
to provide their members with more information on plan solvency and
stability. More than two-thirds of respondents, 67%, said that they
have not had to provide any additional information to quell concerns,
reflecting a confidence (either real or perceived) that plans sponsors
have with how they are communicating to their members.
A new chapter
This chapter in the Canadian pension plan story is punctuated by ongoing
market uncertainty, a shifting spectrum of risks, asset allocation
strategies that need to hedge against inflation and portfolios that
need to perform—to ensure that the pension promise for Canadians is not
RBC Dexia will continue to monitor the pension landscape and share
insights on the trends and key themes that are emerging. The full
report is available for download here.
In April 2011, RBC Dexia Investor Services surveyed Canadian pension
plan sponsors from coast to coast. 108 respondents, with pension plan
assets ranging from less than CAD 100 million to over CAD 1 billion,
formed the results of this particular survey.
About RBC Dexia Investor Services
RBC Dexia Investor Services offers a complete range of investor services
to institutions worldwide. Our unique offshore and onshore solutions,
combined with the expertise of our 5,500 professionals in 15 markets,
help clients grow their business and sustain enhanced performance
through efficiency improvements and robust risk management practices.
Equally owned by RBC and Dexia, the company ranks among the world's top
10 global custodians with USD 2.9 trillion in client assets under
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RBC Dexia Investor Services Limited is a holding company that provides
strategic direction and management oversight to its affiliates,
including RBC Dexia Investor Services Trust, a trust company,
supervised in Canada by the Office of the Superintendent of Financial
Institutions, and authorized to carry on business in the U.K. by the
Financial Services Authority. All are licensed users of the RBC
trademark (a registered trademark of Royal Bank of Canada) and Dexia
trademark (a registered mark of Dexia Crédit Local) and conduct their
global custody and investment administration business under the RBC
Dexia Investor Services brand name.
SOURCE RBC Dexia Investor Services
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