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Plan sponsors face challenges

Thursday January 22, 2015 Written by 
Cautious economic forecasts are creating challenges for defined benefit (DB) plan sponsors already facing a potential increase in their pension obligations due to declines in bond yields in 2014.

Canada’s top economists, strategists, and portfolio managers are cautious about Canadian economic prospects, according to the Annual Survey of Investment Perspectives by Towers Watson, a global professional services company Towers Watson. Canadian GDP is expected to lag the U.S by 0.50 per cent this year.

Forecasters also expect GDP will fall to 2.1 per cent by 2019 and rise to 2.3 per cent by 2029, which is down marginally from last year.

In addition, expectations are that the Canadian unemployment rate will improve to six per cent this year. There is less optimism about a return to par for the Canadian dollar. The majority of respondents expect the Canadian dollar to trade between 85 and 92 cents U.S. in the short-term with moderate appreciation (93 cents) expected over the next few years.

Combined with potentially lacklustre future equity returns, these conditions mean that DB plan sponsors may not see their circumstance improved by market forces alone.

“The latter half of 2014 was an important reminder that market conditions can change rapidly – and along with it, financial stability,” said Gavin Benjamin, a senior consulting actuary in Towers Watson’s Toronto office. “There continues to be a strong desire among many defined benefit plan sponsors to reduce risk in their pension plans. However, as we have only too recently learned, opportunities can be short-lived. To capitalize on favourable de-risking and other opportunities, plan sponsors need to ensure that they are ready to take action when opportunities arise.”

“As investors, we spend a lot of time thinking about economic and capital market risks. However, it’s time to reframe our thinking and consider both financial and non-financial risks and opportunities when setting investment strategy," added Janet Rabovsky, director of investment consulting at Towers Watson’s Toronto office. "For example, the aging demographic in the developed economies, while a threat to mature defined benefit plans, also offers the opportunity to invest in assets and services associated with seniors’ housing, healthcare products and medical devices. The challenge for investors is to remain mindful of all forms of risk and consider not only how to avoid it, but also when to take advantage of the opportunities that risk can provide.”

Towers Watson’s Annual Survey of Investment Perspectives (formerly Economic Expectations) provides forecasts from leading business economists, strategists and portfolio managers. The results have been compiled to give a consensus opinion on Canada’s economic and market prospects over the short (2015), medium (2016 to 2019) and long terms (2020 to 2029).

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