Low rates force different tack for pension plans

“Low risk and low rates” have pension experts talking about an overhaul of current plans to make them more nimble and, indeed, more viable.

Low rates force different tack for pension plans
The CFA Society Toronto held its Spring Pension Conference on pension plan trends Thursday in downtown Toronto. The morning session featured well-known pension expert Malcolm Hamilton and the former head of the Ontario Teachers’ Pension Plan, Jim Leech, talking about so-called “shared-risk” pension plans.

The current ultra-low interest rate environment has made it extremely difficult for pension plans to generate returns needed to cover benefits. Pension plans are typically more invested in low-risk fixed income than other funds. But the current environment of oddly low interest rates—the Bank of Canada overnight rate is just .75% -- is generating worry among pension experts that promised benefits will not materialize. The new and trendy idea these days is that so-called “shared risk” pension plans, or “target benefit” plans will help plan providers solve potential funding issues.
Over the past couple decades, of course, traditional defined benefit plans have been converted to defined contribution plans. This has seen all of the risk for future benefits shifted onto plan members. But this has created a shortage of what experts call “retirement security.” It is hoped so-called shared benefit plans, where employers and employees adjust contributions and benefits depending on the surplus or deficit of a plan, can help address a potential pension crisis.

CIBC economist Avery Shenfeld also appeared at the event. 

Shenfeld had been calling on the Bank of Canada to cut its overnight rate to .5 from .75%. But Wednesday morning the bank said it would leave rates unchanged. The economy added nearly 29,000 jobs in March. This took the pressure off the BofC to cut rates. Shenfeld noted the growth estimates of the BofC are still a bit optimistic. The bank had expected the negative effects of the crash in the price of oil hit in Q1. Stephen Poloz has been hoping the economy would rebound in the second quarter as a result.

Things won’t quite be that rosy Shenfeld noted recently. “After a 0% growth rate in Q1, [the BofC] is looking for a 1.8% rebound in Q2….[But] our average growth rate for the first half is similar with 0.8% growth expected in the first quarter and 0.6% expected in the second.”