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 years.

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 towerswatson.com.

SOURCE: Towers Watson