Enhanced Liability-Driven Investing (LDI)

Key Points

• Defined Benefit (DB) pension plan financials ended 2022 on a solid footing, improving the capacity to take meaningful de-risking actions
• As DB plans look to de-risk at reasonable costs, pension plans may find it beneficial to consider a broad range of investment options
• Completing a core bond allocation with private credit and income-oriented alternative strategies can help achieve important savings over other frequently pursued de-risking approaches, without materially increasing the funded status volatility or downside risk

The Stronger the Wind, the Stronger the Trees

Despite the recent market turmoil, Canadian Defined Benefit (DB) pension plan financials are on a solid footing, even following the financial and economic storm induced by the COVID pandemic. While volatility is still abundant, the solvency ratio of Canadian plans has improved over the past three years according to data tracked by several consulting firms as well as those reported by regulatory bodies. For instance, according to the Financial Services Regulatory Authority of Ontario (FSRAO), the median Ontario defined benefit pension plan had a solvency ratio of approximately 85% in Q1 2020. At the end of 2022, the pendulum has swung in the other direction with the median pension plan having a funded ratio of 112% and over 80% of plans boasting a funded ratio greater than 100%.

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