Challenges
Low interest rate environment is the overriding concern

The persistently “low interest rate environment” further advanced its position as the top near-term challenge overall (20% to 26% year-over-year) and across all respondent categories. This was followed by increasingly popular “economic and geopolitical uncertainty,” which is in a distant second-place tie with “market volatility” (13%).

“Aligning future liabilities with assets” continued its three-year descent from first to fourth spot among the various challenges overall (21% in 2018 to 12% this year), although plans closed to new members rated this as their second-highest concern (14%). “Meeting solvency requirements” emerged as a related challenge (7%) and, combined with the alignment factor, likely reflects ongoing concern about plan sustainability. Other potential concerns are generally deemed relatively unimportant, at least in the near term.

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?
This chart shows the year-over-year change in the top challenges that respondents expect to face 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
This chart shows that the Bank of Canada Policy Interest Rate fell from 1.75% to 0.25% in March 2020 as part of three successive rate reductions.

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
This chart shows Canada’s persistently low interest rates since the financial challenges of 2008 based on the yield curves for zero-coupon bonds at the start of 2001, 2011 and 2021. The yield curves reflect pricing data for Government of Canada bonds and treasury bills with terms to maturity ranging from three months to 30 years as published by the Bank of Canada.

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
This chart shows that the CBOE Market Volatility Index (VIX) is down materially from the pandemic-induced spike in the spring of 2020 but remains higher than pre-pandemic levels.

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.”

This chart shows that the share of Canada’s senior population is projected to increase from 17% in 2018 to 22% in 2030 based on projections from Statistics Canada and RBC Economics.

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
This chart shows that the number of working-age Canadians for every youth and senior is expected to fall from 2.3 in 2010 to 1.7 in 2030 based on projections from Statistics Canada and RBC Economics.
  • 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