SOURCE: Aon Hewitt

Aon Hewitt

November 10, 2015 11:00 ET

Canadian Pensions Adapting to a New World of Risk, According to Aon Hewitt Pension Risk Survey 2015

Public and Private Sector Approaches Reveal a Deep Divide

TORONTO, ON--(Marketwired - November 10, 2015) - Aon plc (NYSE: AON), the leading global provider of risk management and human resource consulting and outsourcing, today released the Canadian results of its Global Pension Risk Survey 2015, which show plan sponsors are evolving their risk management practices to address the challenges of a volatile investment and liability landscape.

More than 100 Canadian defined benefit (DB) pension plan sponsors, representing over one million members and having a combined asset base of approximately $200 billion, participated in the survey. The results indicate that Canadian pension sponsors are making significant progress in what they are planning for and managing risk.

Compared with the results of Aon's previous surveys, the new study suggests that Canadian sponsors are taking a more proactive and long-term approach to risk management. A total of 93% of Canadian sponsors surveyed said they have a long-term objective, compared with 87% in 2013 and only 50% in 2009, and half of respondents said that their plan for reaching that long-term objective is "robust." As well, more than one in three -- 37% -- identify cost stability as a long-term objective, including 50% of publicly traded companies.

The survey also found that a significant proportion of plan sponsors are taking a broader view of investment strategy in the face of continuing volatility in equity and bond markets. More than a third (35%) said that they intend to increase their plans' exposure to alternative assets in the next 12 months, while 27% have delegated the implementation of some or all of their investment policy to a third party. Meanwhile, about four in five (83%) are now monitoring asset performance, liability and funding levels on a regular basis.

Risk Strategies a top priority
Despite consistent signs of an evolution in the way plans are approaching asset risk, the survey found a huge variation in the degree and kind of changes that Canadian sponsors are making to plan benefits. The biggest differentiator: whether the plan was in the public or the private sector.

"In both the public and private sectors, the focus on risk management is greater than ever before. In the private sector, plan closures and transitioning to defined contribution structures have largely already been done, but the search continues for new strategies to reduce or eliminate risk," said William da Silva, Senior Partner and National Retirement Practice Leader, Aon Hewitt. "In the private sector, the name of the game is liability settlement as plan sponsors are looking to eliminate defined benefit liabilities from their balance sheets through lump-sum offers and group annuities. In the public sector, there remains a commitment to the DB structure, but in a more sustainable manner. Public sector plan sponsors are increasingly exploring strategies that balance the needs of all stakeholders through better sharing of risks and costs."

In every sector, more Canadian sponsors are making plans to better manage pension risk, and more than ever they are aware that the road to a successful strategy can be a long one. In fact, this year's survey shows a very small minority of sponsors who have no risk strategy at all.

Sponsors' commitment to a focused risk management approach is reflected in their actions. More sponsors are monitoring asset performance, liability and funding levels regularly -- and the number of sponsors who are monitoring these components collectively has significantly increased over the years. Risk management no longer stops at understanding and managing the financial risks within their plan. For instance, more sponsors are considering longevity risk -- the risk that members' life expectancies will be different from plan assumptions.

"While hedging such a risk in Canada is still in its relative infancy, sponsors are starting to form opinions on whether they can or want to hedge against it," said Tom Ault, Associate Partner and Risk Settlement Group Leader, Aon Hewitt. "We've seen these hedging strategies gain traction over the years in the United Kingdom, and we see interest in this approach among Canadian plans. We expect this to form an important part of sponsors' risk plans as we move forward."

Following the pack is no longer the norm
Diversification and de-risking continue to be key developing trends as sponsors actively manage their portfolios. Whether reducing equity exposure (particularly to Canadian equities), increasing bond allocations (particularly corporate or long-dated bonds) or increasing allocations to alternative assets and real estate, Canadian sponsors are taking action and intend to take even more. These actions are often driven by the sponsor's own unique situation: following the pack is no longer the norm.

Evolving attitudes and actions of plan sponsors
Since Aon's first published survey in 2008, the attitudes and actions of plan sponsors have clearly evolved. The findings of our four previous surveys (2008, 2009, 2011 and 2013) trace the development of the pension de-risking attitudes and practices that we see today:

  • A continued commitment to defined benefits pension in the public sector, but with a realization that changes may be necessary for these programs to be sustainable in the long-term.
  • In the private sector, sponsors are following the global trends to defined contribution and away from the defined benefit model.
  • Developing pension risk strategies that suit the sponsor's own needs is the norm, not the exception; following the pack is no longer considered an effective strategy.
  • Monitoring strategies and the ultimate success of the strategy require taking into account liabilities and assets in addition to asset performance.
  • Taking a more proactive stance on risk in pension plans (through optimization of risk or diversification) is a trend that is here to stay.
  • Delegated Investment solutions are getting more popular with plan sponsors.

Study highlights are available for download at: http://respond.aonhewitt.com/Pension-Risk-Report-CAD

About the Survey
At the end of 2014, Aon Hewitt conducted its fifth survey to understand Canadian defined benefit plan sponsors' current and proposed commitment to managing pension risk. This survey is part of a global series of surveys that follows plan sponsors' risk management attitudes and practices around the world. Previous surveys have been conducted in 2008, 2009, 2011, and 2013.

About Aon
Aon plc (NYSE: AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 69,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com.

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