Capital Markets' Transformation Signals Change in Investment Strategy for Pension Plans and Endowments

Capital Markets' Transformation Signals Change in Investment Strategy for 
Pension Plans and Endowments 
Towers Watson Survey of Economic Expectations predicts moderate growth for 
Canada and convergence with key U.S. economic indicators 
TORONTO, Jan. 16, 2013 /CNW/ - According to Towers Watson's Annual Survey of 
Economic Expectations, Canada's top economists, strategists, and portfolio 
managers predict modest growth for Canada, continuing below trend interest 
rates, modest inflation and average equity market returns over the next few 
Growth expectations for Canada are muted in the near term; however, 
respondents are more positive over the longer term, expecting above average 
growth at 2.5%. Long-term growth expectations for the U.S. are also 2.5% - 
well below their historical average of 3.25%, reflecting continuing concerns 
over the magnitude of the U.S. deficit. 
In early 2012, survey respondents predicted that the Bank of Canada overnight 
rate would increase to 2.5% between 2013 and 2016. This year's predictions 
are much less optimistic, with respondents expecting the overnight rate to 
rise to only 2.0% between 2014 and 2017. Inflation is expected to remain 
controlled at 2%. Respondents also forecast a Canadian dollar near parity 
with the U.S. dollar over the next 15 years. Twenty five percent of 
respondents predict that the Canadian dollar could reach $1.05 U.S. over the 
long term. The convergence of key Canadian and U.S. economic indicators is 
also mirrored in predictions for unemployment rates. 
"We were initially surprised to see a convergence of expectations for Canadian 
and U.S. economic indicators," said Janet Rabovsky, Director of Investment 
Consulting Services at Towers Watson. "Growth predictions may reflect recent 
studies that suggest the output gap between Canada and the U.S. has been 
overstated in the past, but could simply be a reaction to the relative 
magnitude of government deficits" 
Re-thinking Response to Risk 
While survey respondents expect that Defined Benefit (DB) solvency funded 
ratios will improve over the long term, DB pension plans - those that promise 
a guaranteed level of pension for the retiree's lifetime - will continue to 
face the dual challenges of lower than average long-term interest rates and 
volatile equity markets in the near term. Not surprisingly, the cost of the 
DB promise continues to weigh heavily on the financial performance of the 
organizations that sponsor DB plans. Many plan sponsors continue to seek 
ways to mitigate their financial risks. Some have sought to de-risk by 
shifting to the "safety" of bonds but with predictions of continued low 
returns, many are rethinking long-held beliefs about their investment 
strategies. As the markets evolve, sponsors of pension plans and 
endowments are starting to explore new ways to use traditional tools in 
non-traditional ways. 
"With expectations of continued low returns," said David Service, Director of 
Investment Consulting Services at Towers Watson, "Plan sponsors have started 
to assess more critically the investment tools they've historically used to 
boost returns and reduce risk. Led by some of the larger, more sophisticated 
plans, Canadian pension funds are accelerating a trend toward alternative 
assets such as real estate, infrastructure and agriculture." As Service 
observes, "Based on respondents forecasts and our own capital market 
assumptions, it appears we are likely to be stuck with low interest rates and 
modest equity returns for the next few years, so plan sponsors need to explore 
all alternatives for managing risk." 
About the Survey
Towers Watson's Annual Survey of Economic Expectations provides forecasts from 
leading business economists, strategists and portfolio managers from more than 
169 organizations. The results have been compiled to give a consensus 
opinion on Canada's economic and market prospects over the short (2013), 
medium (2014-2017) and long terms (2018-2027). 
Towers Watson Investment
Towers Watson Investment is focused on creating financial value for the 
world's leading institutional investors through its expertise in risk 
assessment, strategic asset allocation and investment manager selection. It is 
a division of Towers Watson's Risk and Financial Services business, has over 
750 associates worldwide and assets under advisory of over US$2 trillion. 
About Towers Watson
Towers Watson (NYSE, NASDAQ: TW) is a leading global professional services 
company that helps organizations improve performance through effective people, 
risk and financial management. The company offers solutions in the areas of 
benefits, talent management, rewards, and risk and capital management. Towers 
Watson has 14,000 associates around the world and is located on the web at 
Media Contacts: 
Sherry Boisvert 416-355-7418 
Stacey Grimshaw 416-355-7426 
SOURCE: Towers Watson 
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CO: Towers Watson
ST: Quebec
-0- Jan/16/2013 13:00 GMT
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