Focusing on the
economy—and politics
- Aligning liabilities with assets
reflects concern about plan sustainability
What are the top three challenges your pension plan faces over the next 12 months?
*Including annuitizing closed plans; cyber/privacy issues; ensuring safety of employees; and expanding digitization/data strategy
Almost nothing
Just when it was thought that interest rates couldn’t fall any lower, COVID-19 emerged and the Bank of Canada reduced its Policy Interest Rate in March 2020 from 1.75% to 0.25% as part of three successive reductions, which remain in effect.1
Bank of Canada Policy Interest Rates
Furthermore, Canada’s long-term interest rates have been persistently low since the financial challenges of 2008, as demonstrated by the contrasting yield curves for zero-coupon bonds over the past 20 years.2
Yield Curves for Zero-Coupon Bonds
Increasing polarization
There is no shortage of political turmoil in today’s increasingly polarized world, ranging from trade wars and climate change to a renewed focus on racial injustice and the rise of populist movements. This is reflected in respondents’ higher year-over-year ranking of economic and geopolitical uncertainty as a top challenge, increasing from 7% to 13% in a second-place tie with market volatility.
Awaiting sustainable growth
Concern about market volatility continues (tied for #2 challenge). While the CBOE Market Volatility Index (VIX) is down materially from the pandemic-induced spike in the spring of 2020, it remains higher than pre-pandemic levels.3 According to RBC’s Deputy Chief Economist, Dawn Desjardins: “News that vaccines are being distributed has brightened the outlook. However, given the resurgence in infections, volatility remains higher than before the crisis. In the near term, the impact of rising COVID caseloads will weigh on the economy with stronger growth momentum only expected to emerge once vaccinations are more widely distributed. This uncertainty is expected to keep volatility measures higher than normal and it is only likely to ease once there is confidence that the economy is on a sustainable growth path.”
CBOE Market Volatility Index3
Volatility is only likely to ease once there is confidence that the economy is on a sustainable growth path.
—Dawn Desjardins, Deputy Chief Economist, RBC
Addressing demographic shifts
Preoccupied with COVID-19, pension plans appear to have relegated concern about demographic changes to the back burner (7% to 3% year-over-year). This is likely to change as the advancing age of baby boomers puts pressure on Canada’s pension system in the coming years.
Andrew Agopsowicz, Senior Economist at RBC Economics, highlights what is projected to be a rather startling demographic shift: “Life expectancy at 65 is seeing people live slightly longer than a generation ago. However, by far the main source of demographic pressure comes simply from the size of the baby boomer cohort, which is expected to increase the share of the senior population from 17% in 2018 to approximately 22% in 2030—triple what we saw from 2000 to 2009 and nearly quadruple that experienced in the 1990s.”
The past five years has seen a dramatic rise in the number of new immigrants but this has not been enough to offset the increasing size of the retired population.
—Andrew Agopsowicz, Senior Economist, RBC
According to Agopsowicz, “The primary reason for such a dramatic aging of the population is that, following the baby boom, Canada’s fertility rate plunged and has remained persistently low ever since—a record low today. The past five years has seen a rise in the number of immigrants, but this has not been enough to offset the increasing size of the retired population.”
Feeling the squeeze
Working-age Canadians may feel the financial squeeze as a shrinking workforce supports an aging population. In 2010, there were 2.3 working-age Canadians for every youth and senior but this is expected to drop to 1.7 by 2030.5
Working-Age Canadians for Every Youth & Senior
- 1Bank of Canada Policy Interest Rates as at January 20, 2021
- 2Yield curves at the start of each calendar year for zero-coupon bonds based on pricing data for Government of Canada bonds and treasury bills with terms to maturity ranging from three months (3m) to 30 years (30y) as published by Bank of Canada
- 3Wall Street Journal/Haver Analytics as at January 1, 2021
- 4Statistics Canada and RBC Economics, September 17, 2019
- 5Statistics Canada and RBC Economics, January 2020