Many corporate pension plans in Canada have been looking to take risk off their balance sheets and increase focus on their core business. Sixty-six percent of plans report becoming more risk aware in their asset allocation. Of these, 71% report they are doing so by de-risking their portfolios, 19% are moving to risk factor allocations and 14% are annuitizing their portfolios.
Approximately 3 in 10 (28%) respondents say they reduced equities and increased fixed income in the last three years, while 31% report increasing the duration of their fixed income. Nineteen percent report increasing investment-grade corporate fixed income. However, just 13% say they have moved domestic assets to foreign fixed income.
Looking forward, plan sponsors are clearly considering dialing down risk and have an eye on more fixed income investments, especially those marked investment grade. The majority of plan sponsors (58%) agree with the statement that fixed income investments will play a more important role in the near future than in the past five years. Plan sponsors indicate that the top risks facing their fixed income portfolio are duration risk (34%), followed by geopolitical risk (19%) and inflation risk (13%).
While geopolitical risk is top of mind, this may be more of a knee-jerk reaction than an actual factor influencing fixed income; because geopolitics is consistently in the news, it could result in a perception that it is a top risk. However, in reality, it may be that all the noise around geopolitics heightens a sense of perceived risk. Geopolitical risk may also be ranked high because there is not a lot of clarity on the outcomes or how plan sponsors could address these risks, even if they desire to make an adjustment. Credit generally has done well and has been supported by sound fundamentals, which may explain its popularity with respondents.
When evaluating fixed income categories for their risk-return opportunities, plans favor investment-grade corporate bonds (31%), followed by emerging market bonds (28%), global unconstrained bonds (25%), high-yield corporate bonds (25%) and long-duration bonds (22%). Meanwhile, only 9% of plans label Canadian bonds as a top choice. (See Figure 2 below)
These responses suggest that there is a disconnect between attitude and action, as plans don’t expect much from Canadian bonds even though this is where they are predominantly invested.