Towers Watson Survey of Economic Expectations predicts a low interest
rate environment to continue - to the detriment of pension plan funding
TORONTO, Jan. 20 /CNW/ - Canada's top economists and portfolio managers
are expecting interest rates to stay below the historical trend over
the medium term, which creates an additional burden for the financing
of traditional defined benefit (DB) pension plans. Predictions that the
large solvency contributions made by many DB plan sponsors, combined
with rising interest rates and solid equity returns, might push plans
toward surplus within a year or two now seem overly optimistic. New
survey findings from Towers Watson's 30th Annual Canadian Survey of Economic Expectations suggest there will be
further delay before many DB plans become fully funded.
Overall, the survey respondents forecast modest growth, low inflation
and low interest rates to continue in the short term. Expectations are
for Canadian real GDP growth to hover between 2% and 2.5% this year,
with inflation remaining below 2%. While medium-term projections
foresee improvement, most of the economists and strategists surveyed do
not anticipate a full recovery in Canada until at least the end of
2012. Furthermore, the majority expect the central bank policy interest
rate to stay below 3.5% in both Canada and the U.S. over the next few
Despite the generally weak economic outlook, respondents are bullish on
stock market performance, with almost 40% of survey participants
expecting a return of 10% or more from the TSX and S&P 500 indices in
2011. In particular, demand from emerging markets is seen as a likely
driver of economic activity.
"There is a general consensus that economic growth in the emerging
markets will outperform that of the advanced economies," says Janet
Rabovsky, a senior consultant in Towers Watson's Investment practice.
"As a result, the vast majority of the money managers we surveyed
expect emerging market equities to be one of their strongest-performing
asset categories, especially over the long term."
Equities Too Hot to Handle?
While the potential returns provided by equities may be tempting, equity
investment comes with a risk - as amply demonstrated by the economic
downturn - and pension plan sponsors are proving circumspect. Towers
Watson research on plan sponsors' investment strategies indicates that
smaller plans are trending away from equities into fixed income, while
plans with more than $1 billion dollars in assets are shifting away
from both traditional equities and fixed income into alternatives such
as infrastructure, hedge funds and real estate. "In addition to
broadening the sources of risk and return, more attention is being paid
by the larger players to specialized investment strategies, especially
within the alternative classes," says David Service, a senior
consultant in Towers Watson's Investment practice. "The goal for many
is to avoid the equity risk."
This year, perhaps more than ever, a desire for secure and stable
returns is on the agenda for pension plan sponsors. The topic is top of
mind for employees as well, with Towers Watson research finding that
Canadians cite competitive retirement benefits as among the five most
important reasons to join a company. Going into 2011 and beyond,
securing risk and maintaining stable pension plans will be a priority.
About the Survey
Towers Watson's 30th Annual Canadian Survey of Economic Expectations
provides forecasts from leading business economists, analysts and
portfolio managers from over 45 organizations. The results have been
compiled to give a consensus opinion on Canada's economic prospects
over the short (2011), medium (2012-2015) and long terms (2016-2025).
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global professional
services company that helps organizations improve performance through
effective people, risk and financial management. The company offers
solutions in the areas of employee benefits, talent management,
rewards, and risk and capital management. Towers Watson has 14,000
associates around the world and is located on the web at towerswatson.com.
SOURCE Towers Watson
For further information:
David Le Roy
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