The events of early 2025 serve as a reminder of the many risks and uncertainties faced by Canadian pension plans and their sponsors[1]. The following are just a few examples:
- The release in January of the artificial intelligence company DeepSeek’s latest AI model caused significant volatility in equity markets and highlighted the concentration risk that exists in the U.S. equity market.
- The potential tariffs of up to 25 per cent on imports to the U.S. from Mexico and Canada, as well as tariffs imposed by the U.S. on other countries, and what a trade war could mean for both a pension plan sponsor’s business and the funded position of their pension plan.
- Conflicts continue in a number of areas of the world, such as in Ukraine and the Middle East.
It is noteworthy that the Bank of Canada acknowledged that the projections in their January Monetary Policy Report were subject to more than usual uncertainty due to the current environment.
If you are a pension plan sponsor and are considering how to react to today’s uncertainties, here are four recommended areas to focus on in addition to broader business considerations:
Pension risk management framework
In 2025, most pension plan sponsors should be reviewing their pension risk management practices relative to the requirements of the new Canadian Association of Pension Supervisory Authorities (CAPSA) Guideline for Risk Management for Plan Administrators (Risk Management Guideline) that was published in September of 2024. The current environment of uncertainty adds a level of urgency to this review and addressing any material risk management gaps that the review uncovers.
When establishing or updating their pension risk management framework to align with the requirements of the Risk Management Guideline, plan sponsors should also identify any risks that may have become more material due to the current environment. For example, the risk of large increases to future minimum funding requirements to a defined benefit (DB) pension plan may have increased due to the potential for elevated volatility levels in the financial markets. Note that this assessment will not necessarily lead to additional controls to mitigate material risks that are identified. The elevated risks may still fall within the plan sponsor’s risk limits, and it could therefore be sufficient to quantify the risks (e.g., through stress testing) so that the sponsor understands the implications should one or more of the risk scenarios materialize. With the advances in risk assessment tools available to plan sponsors and their advisors, the quantification and timely monitoring of many risks have become much more feasible and efficient.
A review of the risk management practices for a DB pension plan may reveal that reducing risk is appropriate. For example, the plan sponsor may conclude that it would be ideal to reduce investment risk or transfer risk to an insurance company through a group annuity purchase. If this is the case, the good news is that de-risking at this time may well be feasible since most DB plans are in a strong funded position, and de-risking is usually more affordable for a well-funded plan.
Market risk in pension plans
For many plans, the current uncertain environment has likely increased market risk, which is the risk of adverse market investment performance of the pension fund. While periods of elevated market risk are to be expected from time to time, this would be a good time for pension plan sponsors to confirm that their pension investment strategy remains appropriate, especially if they have not performed a recent review of the strategy.
For DB plans, this may include ensuring that the target asset allocation remains appropriate, the concentration risk in the fund is not too high, the fund is expected to remain sufficiently liquid even in extreme adverse scenarios, and that the exposure of the fund to foreign currency risk is at an acceptable level.
For defined contribution (DC) plans, this may include ensuring that the plan’s default investment option, which is often a target date fund, remains best-in-class and appropriate for the plan membership. Also, the types of investment options offered by the plan could be reviewed to ensure that the investment line-up provides sufficient opportunities for diversification for plan members with different risk profiles.
Early DB funding valuation
Pension legislation in some jurisdictions, such as Ontario, permit the filing of DB plan funding actuarial valuations with an effective date that is earlier than the legislatively required date. Plan sponsors with a pension plan registered in one of these jurisdictions that are not required to file a valuation in 2025 may wish to consider preparing and filing an early valuation (e.g., a valuation with an effective date of December 31, 2024). Filing an early valuation can potentially establish short-term pension contribution certainty based on a valuation effective date on which the plan was in a strong funded position. This can help manage the plan sponsor’s funding risk, which can strengthen sponsor support for the plan in the long-term, by providing contribution stability in the event of a short-term decline in the plan’s funded status caused by either poor asset returns or a decrease in long-term interest rates at the same time as a challenging point in the business cycle.
Before deciding to prepare and file an early actuarial valuation, it is important for the plan sponsor to consider both the pros and cons of this approach, including the costs associated with performing the work. Also, deciding to perform an early valuation should be weighed against whether such an action is in the best interest of plan member benefit security, which in some cases may not be a straightforward deliberation.
Employee communication
It should be no surprise to pension plan sponsors that the current environment has likely increased concern among their employees about their own financial health, including the sufficiency and security of their income in retirement. These types of employee concerns often have negative implications for employee engagement and retention.
Plan sponsors should consider communicating to employees to address these concerns. For example, for DB plan members the communications could remind employees of how a DB plan works and discuss the legislative and governance mechanisms that exist to reduce the likelihood that member benefits will be reduced in the future. For DC plan members, the communications could remind employees of their responsibility to select investment options that are appropriate to their circumstances and emphasize the importance of focusing on the long-term when making investment decisions.
If the sponsor has a robust risk management framework in place, communicating the key components of the framework should provide employees with additional comfort knowing that the risks in their plan are being managed.
The employee communications should ideally have a broader focus than just pensions and should address the programs and options available to enhance employees’ overall financial wellbeing, of which sufficient and secure retirement income is just one component.
When assessing the implications of the current uncertain environment for their pension plans, plan sponsors should always consider the long-term implications of any decisions and avoid actions based on short-term considerations that could have long-term detrimental effects on the plan and plan members.
However, it is also not prudent for plan sponsors to ignore material short-term risks to their plans. It should be noted that with the strong-funded position of many DB pension plans, there may be an unique opportunity in 2025 for DB plan sponsors to reduce risk in their plans at an affordable cost, thereby fulfilling the dual objectives of protecting the plans against short-term risks that may be elevated in the current environment and, at the same time, enhancing the sustainability of the plans over the long-term.
While the considerations for each pension plan sponsor will differ depending on the circumstances of their organization and their retirement program, it is important for all plan sponsors to proactively assess the risks and opportunities that the current environment presents and to take timely action where appropriate
This article was written by Gavin Benjamin – Partner, TELUS Health Consulting
[1] This article uses the term “sponsor” to refer to the entity responsible for certain oversight and actions related to pension plans. This term includes the pension plan administrator for situations in which the plan administrator is the entity legally responsible for the oversight and actions.