No Fast Relief for Canadian DB Pension Plans

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 years.

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

SOURCE Towers Watson

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