DB and DC plan sponsors look to improve portfolio efficiency
TORONTO, Jan. 16, 2014 /CNW/ - According to the Annual Survey of Economic
Expectations by global professional services firm Towers Watson (NYSE, NASDAQ:
TW), Canada's top economists, strategists, and portfolio managers predict
modest growth for both Canada and the United States, with Canada lagging the
U.S. in both economic activity and job creation over the next few years.
Global growth is expected to improve but remain relatively subdued, leading to
continued low interest rates in most countries for at least another year,
according to the survey. In addition, it shows that despite rising long-term
interest rates, economic activity in Canada remains fragile and reliant on
improvement in the United States and Europe and continuing strength in China.
In the near term, survey respondents expect Canadian GDP growth to remain
around 2%, rising to 2.4% over the longer term. While the recent decline in
the Canadian dollar may provide some welcome relief to exporters, however, the
majority of survey respondents expect the Canadian dollar to appreciate to
close to par over the long term.
Janet Rabovsky, Director of Investment Consulting at Towers Watson's Toronto
office said: "With a lower Canadian dollar, there is hope that manufacturing
businesses, and certainly the export sector of the economy, can contribute to
reducing the unemployment rate in the next few years. That being said, recent
announcements about industrial plant closures in Ontario would indicate that
the cycle has not yet turned."
With inflation in check and the lower Canadian dollar, the Bank of Canada
signalled a neutral stance on interest rates in 2013. Survey respondents
expect the Bank of Canada's overnight rate to increase from its current level
of 1% to 2% in 2015 - 0.50% lower than last year's forecast. While respondents
expect short-term rates to remain relatively low over the next few years, they
expect the ten-year government of Canada bond to rise to 3.8% by 2018.
"The increase in longer-term interest rates in 2013 provided welcome relief
for DB pension plan sponsors whose funded positions benefited from this and
strong capital market returns during the year," said Rabovsky. "According to
our data, the average solvency funded ratio for a typical Canadian pension
plan reached 100% by December 31, 2013."
Survey respondents are not overly bullish about equity market returns over any
time period. The majority expect the S&P / TSX Composite Index to return
between 6% and 10% over the short, mid and long term. The most surprising
forecast is for emerging market equities, which the majority of survey
respondents expect to return below 5% in 2014 and between 6% and 10% over the
medium and longer term.
Improved Portfolio Efficiency
The increasing correlation between different equity markets, coupled with the
forecast for lower returns, have DB pension plan sponsors seeking other ways
to diversify their investment portfolio, according to Towers Watson. This
suggests that while many continue to look to alternative asset categories for
diversification, there is renewed focus on more efficient and cost-effective
implementation strategies, such as smart beta, which involves accessing
markets in a more intelligent way through non-price indices, low-volatility
equities or thematic investing. Towers Watson's clients have already allocated
US$20 billion of assets to smart beta strategies globally.
"These strategies have been around for more than 10 years and are now really
getting some serious attention from pension funds given the expected
low-return environment and desire to only pay for manager skill or alpha where
it truly exists," explained Rabovsky. "Over the past few years, investment
characteristics that had once thought to be alpha have been identified and
segregated and can now be quasi indexed or systematized."
According to Michelle Loder, Towers Watson's Canadian Defined Contribution
Business Leader, smart beta strategies are not just for DB plans. They are
increasingly being added to DC record keeper platforms, either as part of a
portfolio solution or as a standalone option. "As benefit adequacy issues come
into focus, the trend to institutionalize DC investment structures will
continue," adds Loder. "In line with this, we will see more smart beta
strategies in DC portfolios, such as listed infrastructure and REITs, as
sponsors look to more sophisticated diversified solutions to target
risk-adjusted return expectations and focus members on achieving retirement
About the Survey
Towers Watson's Annual Survey of Economic Expectations provides forecasts from
leading business economists, strategists and portfolio managers from more than
128 organizations. The results have been compiled to give a consensus opinion
on Canada's economic and market prospects over the short (2014), medium
(2015-2018) and long terms (2019-2028).
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, fiduciary management and investment
manager selection. Towers Watson's Investment business has over 750 associates
worldwide, assets under advisory of over US$2 trillion and around US$60bn of
assets under management.
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 consulting, technology and
solutions in the areas of benefits, talent management, rewards, and risk and
capital management. Towers Watson has more than 14,000 associates around the
world and is located on the web at www.towerswatson.com.
SOURCE Towers Watson
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