Pension funds looking to take on more risk as they reach for returns: report

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OTTAWA — Pension fund managers are looking at taking on more risk in their portfolios as they look to boost returns amid low interest rates and volatile stock markets, according to a report by Pyramis Global Advisors.

Derek Young, president of global asset allocation at Pyramis, said pension plans in the survey in general have set ``very high expectations'' for investment returns and in order to meet those goals are rethinking their investments.

``The are really reaching for risk and particularly they are going more toward alternatives and even more specifically they are going toward illiquid alternatives,'' Young said.

Investment return expectations vary around the world, but Canadian plans on average expect a six per cent return, according to the survey. That compared with eight per cent in the United States and five per cent in Europe and Asia.

However, the survey found 36 per cent of fund managers felt they would not achieve their expected return over the next five years, including 40 per cent in Canada.

``These targets and their ability to achieve them are under an incredible amount of pressure,'' Young said.

Pension managers have taken a double hit in recent years.

While stock markets crashed during the financial crisis and have been volatile ever since, defined benefit plans have also seen their liabilities soar due to falling interest rates, which are used to calculate the cost of promised benefits.

The combination has put many plans into a deficit position, leaving them with less than they would need to pay pensions in the future if they were forced to wind up today.

The Pyramis survey covered 632 corporate and public pension plans in 16 countries around the world, including 92 Canadian pension plans. In total the plans included in the review held US$5 trillion in assets.

Young said the traditional view of pension fund managers of focusing on the long term is changing as they take a more tactical view of investing.

He said pension fund managers are rethinking their approach to asset allocation and looking at using more aggressive classes such as emerging market stocks and debt.

And while 48 per cent have been reviewing their risk management measures more frequently since the financial crisis, 41 per cent said they were being more tactical in their asset allocation decisions.

But Young notes that being aware of risk in a portfolio doesn't eliminate the risk in a portfolio and he said illiquid assets can make a portfolio appear less risky than it actually may be.

Unlike stocks, which can be bought and sold every day, the value of an illiquid investments like big infrastructure assets aren't really known until it comes time to sell.

Last week, a report by consulting firm Mercer said its pension health index, which measures the ratio of assets to liabilities for a model pension plan, stood at 80 per cent at Sept. 30, up from 77 per cent at June 30, helped by strong returns on the stock market.

Mercer said Canadian stocks returned seven per cent in the third quarter to bring the return for the first nine months of the year to 5.4 per cent.

However, the firm noted that the majority of pension plans still face significant solvency deficits.

Organizations: Pyramis Global Advisors

Geographic location: OTTAWA, United States, Europe Asia Canada

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