Canadian Pension Plans: Facing-off your investment challenges


Canadian pension plans can be forgiven for feeling like they are being sent back over the boards by their coach for another bruising encounter with financial markets. The Canadian economy weathered the Global Financial Crisis better than many of its developed market peers. However, warning signs on the horizon, such as the prospect of rising yields, heightened market volatility, strong Canadian dollar and revised interpretations of risk will inevitably have a big impact on what plan investment portfolios will look like in 5–10 years’ time.

In this paper we provide insight and comment on the country’s economic drivers (page 2), market performance (page 7) and pension plan allocations (page 11). Having built a background to pension plans’ challenges and environment we provide our suggestions on what pension plans can do next (page 13).

The main findings of our paper provide a number of conclusions:

  • Canadian pension plans form a large and sophisticated market, somewhat polarized, having some mega-sized plans and a large number of mid-sized plans. Each pension plan is different in terms of its liabilities, capabilities, tolerances and preferences, and so there is certainly no single ‘one-size-fits-all’ solution. Our menu of ideas and suggestions aims to form a starting point for discussions, some of a wider nature and others specific to each investor
  • One of the biggest challenges for plans in the near future will be in their bond allocations as the outlook here has changed significantly. While bonds have enjoyed a 30-year bull run, providing yield, capital gain and real returns, the future prospects now look bleaker. We outline the different criteria a range of bond investors will look for as these define the approach needed
  • We share some thoughts on approaches to currency hedging, highlighting that this is an area where, paradoxically, doing nothing leads to an active position. Over the past decade, the strengthening Canadian dollar has seriously eroded the returns from foreign investments, leading to a heightened focus on the matter going forward
  • Canadian plans’ portfolios contain high levels of equity risk, in some cases explaining 95% of total portfolio risk. We discuss how plans can diversify their risk by using a range of growth assets to achieve returns in excess of inflation over the long-term. We also advocate the use of dynamic approach to allocations to reflect the difference in long run expectations and short term realities
  • The Global Financial Crisis brought the volatility of asset classes into sharp focus for many investors. The search is on to find reliable protection during the short and severe market downturns, while limiting the impact on expected upside returns over the medium term. Using dynamic risk control measures at portfolio level can help to achieve that goal 

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.