Morneau Shepell’s May 2020 Pension Risk Bulletin
Morneau Shepell’s Pension Risk Transfer Team publishes a periodic Pension Risk Bulletin to provide pension risk transfer and risk management updates and views to defined benefit pension plan sponsors in Canada. The May 2020 edition of the Pension Risk Bulletin addresses the impact of the COVID-19 pandemic for plan sponsors and for their risk management and risk transfer strategies.
- As a result of the pandemic, several risks faced by defined benefit (DB) plans have materialized in the first quarter of 2020. The current crisis greatly exceeds any prior perfect storm from the standpoint of DB plans. Some of the economic risks for DB plans in the current context include equity risk, interest rate risk, credit risk, liquidity risk and funding risk.
- The effectiveness of risk management strategies is being tested. Interest rate risk hedges, such as Liability Driven Investment (LDI) strategies, may become less effective given the current level of interest rates.
- Pension regulators across Canada have announced a variety of temporary measures, such as relief measures on solvency special payments and suspension of buy-out transactions.
- With quantitative easing and the accommodating policy of the central banks, risk free rates are slowly converging to 0% across the yield curve, creating a potential issue for pension plan assets that may yield significantly less than inflation.
- The makeup of a pension plan’s discount rate (and liabilities) has changed over the last 4 months. Government of Canada bond yields have declined and corporate credit spreads have widened, affecting solvency and accounting liabilities differently.
- Pension plan setbacks in funded status and the markets’ illiquidity have contributed to reduced demand for pension risk transfers even though the supply from insurers is steady for the most part. Most insurers are still open for business and actively providing quotes when requested. They have adapted their quoting methodologies to deal with the large intra-day movements in spreads and liquidity issues seen at the end of the first quarter.
- In the short term, plan sponsors and administrators should be asking themselves some important questions:
- Has my pension risk budget changed?
- Am I spending my risk budget efficiently?
- Can I still transfer some or all of my pension risk?
- Do I have the right governance structure to supervise, manage and administer my pension investments?