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How Leading Pensions are Managing their Greatest Risks
By Matthew Streeter CFA | May 12, 2017

I recently attended the Canadian Pension Risk Strategies Summit in downtown Toronto. This conference provided a great opportunity to hear about some of the most pressing issues confronting pension plans, insurers, consultants and asset managers today. Featured speakers included David Kaposi of Ontario Power Generation, John Poos of Loblaw Companies Limited and Patrick De Roy of Caisse de dépôt et placement du Québec (CDPQ).

Defined benefit pension plans face many risks, the most serious being the potential inability to meet all of their obligations. During the event, Canada's top plan sponsors and industry experts shared their experience on how pensions can improve their plan's funded status with discussion on key risk considerations and how to better manage them.

Session breakouts included presentations on plan de-risking strategies, pension risk transfer strategies as well as the role and benefits of strategies involving derivatives and alternative investments. All of this dialogue was set against a backdrop of difficult market conditions, including a low-yield and competitive environment, which make it challenging for pensions to achieve their return targets. In speaking with attendees, it was clear that many were concerned with finding ways of achieving plan returns that match their liabilities.

One area that garnered substantial attention was the growing popularity of pension de-risking strategies and the growth of the annuity, buy-in and buy-out market. Pension plan sponsors are facing mounting pressures to de-risk due to plan administration costs, and the overall low-growth economic environment. Many market practitioners feel such an approach can substantially lower risk for a pension. In fact, many pension plans have been able to maintain or improve their funded status using this approach, despite a difficult economy.

Summit speakers also addressed the various considerations pensions should take into account as they work to build effective liability hedging portfolios. Attendees learned how best to execute hedging strategies, and improve investment decision making in order to achieve solid returns and meet liability matching targets. For many plans, how they are managing their funding status has recently endured extreme change and is likely to continue. Strong returns from equities and higher bond yields have enabled many pensions to increase plan funding, and have also provided an opportunity to develop and implement effective risk management strategies.

For pensions, the ability to accurately measure the performance of different asset classes and investment strategies is key. This information can aid in making optimal investment decisions and provide greater insight for risk management. Speakers stressed the importance of having the right tools for benchmarking and measuring the success of liability valuation methods. It’s worth noting, that the FINCAD F3 portfolio and risk management solution is used by leading pensions to manage their investment portfolios containing derivatives and fixed income instruments, and helps to optimally hedge their risk and improve returns.

Overall, this summit offered a great venue to share thoughts on some of the key issues pensions face throughout North America, and I am eager to see what is planned for next year. If you are interested in learning more about the pension and insurance investment industry, we welcome you to attend our upcoming insurance Solvency II event, taking place in London, UK on June 22nd. More information about this event will be posted soon to the Events section of our website.

For more information and best practices related to liability-driven investing, be sure to watch our on-demand webinar: Proven Tips for Maximizing Success with an LDI Strategy