UPDATE 2-Bank of Canada sees low rates as challenge for pension funds

Thu May 15, 2014 2:21pm EDT
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(Adds remarks on low rates, paragraphs 9-13)

By Marie-Pier Cayer

QUEBEC CITY May 15 (Reuters) - Interest rates are likely to stay low for an extended period, posing a major challenge to the pension industry, Bank of Canada Deputy Governor Lawrence Schembri said on Thursday.

"By far the biggest challenge faced by defined-benefit pension funds since the financial crisis has been the low level of long-term interest rates," Schembri said, noting that low rates had reduced solvency ratios.

"These ratios have now partially recovered, as low interest rates have boosted equity prices, but interest rates are likely to remain relatively low for an extended period as the Canadian and global economies slowly recover," he said in the prepared text of a speech he was delivering in Quebec City.

He welcomed the fact that many pension funds searching for yield had made alternative investments in real estate, private equity and infrastructure but said liquidity and credit risks had to be prudently managed.

Increased longevity may in some cases require adjustments to contribution rates and benefit levels, Schembri said, addressing the Pension Investment Association of Canada.

He decried what he termed "short-termism" investment strategies, whereby some funds may be prompted by fair-value accounting and solvency rules to shorten their investment horizons to minimize volatility. Such strategies may be costly, and fortunately most funds are instead committed to disciplined rebalancing, he added.

Schembri said new resolution regimes for financial institutions seen as 'too big to fail' may provide attractive equity-like investment opportunities for pension funds.   Continued...