Managing risk a priority for DB plans

Plans moving toward equal split of equity and bond allocation
|hrreporter.com|Last Updated: 01/25/2011

Defined benefit (DB) pension plans are moving away from traditional investment strategies in an effort to manage risk, according to a new survey.

“The traditional balanced fund is now the exception rather than the rule for Canadian DB plan sponsors,” said Rob Stapleford, a principal with Mercer’s investment consulting business in Toronto.

More than 190 DB plans were surveyed as part of Mercer’s 2010 Asset Allocation Survey for Canadian Defined Benefit Plans.

The survey indicates a transition from the 60/40 equity/bond mix toward a 50/50 equity/bond allocation for many institutional investors, with small and more mature plans leading the way.

The higher the proportion of liabilities with respect to inactive members, the higher the allocation to bonds and the lower the allocation to equities.

"Plan sponsors show great interest in the asset allocation decisions of their peers, and we have seen many initiate transitions toward more diversified asset mixes,” said Stapleford.

"The results lead us to believe that de-risking strategies will continue to gather momentum, although the pace at which they will be implemented may be slow given low current yields on fixed income investments. We also anticipate growing interest in dynamic de-risking strategies, which lock in a portion of investment gains as they occur.”

Sponsors with long-term plan horizons will likely continue to explore opportunistic investments in the pursuit of higher returns, he said. At the same time, governance priorities will extend to assessments of operational risks and further delegation of operational decisions in the future.

Other key findings:

•Less than 50 per cent of fixed income assets in Canadian DB plans are allocated to universe bonds.

•Closed plans have led the way in transitioning to longer duration assets.

•Alternative investments and currency hedging are more prevalent among larger plans.

•Approximately three-quarters of the plans review their strategic asset allocation every three to five years.

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