April 22 Benefits and Pensions Monitor Daily News Alerts

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Regulators Responded To Cash Flow Issues

Pension regulators across Canada responded to the threat of cash flow issues at pension plans due to the COVID-19 pandemic, says Leah Fichter, executive director of the pensions division with the Financial and Consumer Affairs Authority of Saskatchewan (FCAA) and Saskatchewan’s deputy superintendent of pensions. In ‘The Impact of COVID-19 on Pension Plans: How Did Governments and Regulators Respond to the Crisis?’ at the ‘10th Annual CPBI Saskatchewan Regional Conference,’ she said they looked first at defined contribution plans, she said most jurisdictions in Canada, including Saskatchewan, temporarily suspended contributions. “We did put some restrictions on this. The plan would have to be amended and the suspension have to be temporary only. We cautioned that there were employment law considerations. For example, collective bargaining agreements would have to be honoured and, in some jurisdictions, both employee and employer contributions would have to be suspended together.” However, while some requests, primarily from insurance companies, for this were made before the action was taken, she said they found across Canada there wasn't really much uptake on this. She said this may be because the life insurance companies were being proactive and wanted this available just in case. The other thing is that employers who were experiencing cash flow issues laid off or terminated people. By doing that, they wouldn't be making contributions for those people because contributions are based on pensionable service. With defined benefit plans, it was complicated and the solution was different across Canada. The solution that the jurisdictions used was dependent on the jurisdiction’s current solvency funding rules, as well as what the governments and regulators were hearing from employers about their plan solvency.

More Market Shocks Coming

Michael Hunstad, managing director, head of quantitative strategies, at Northern Trust Asset Management, expects the frequency of the volatility shocks will continue to increase. He told the Benefits and Pensions Monitor Meetings & Events ‘Low Volatility Investing ? Where do we go from here?’ webinar that they've been increasing substantially over the last several years. Since the global financial crisis 15 years ago, there’s been a handful of really severe market shocks. “So there's a lot of reasons to expect these shocks to continue and this is typically when low volatility strategies do well,” he said. And barring another COVID event, low volatility strategies will continue to behave as they have in the past, providing an asymmetric beta with a limited downside while they participate almost fully in the upside. That asymmetry will continue to generate excess returns going forward. The traditional mechanics of a low volatility strategy is a pretty simple, he said . When markets goes through a shock, there tends to be a relatively wide dispersion in the performance of individual stocks. More often than not, lower volatility, higher quality securities go down less than the rest. So the market may be down, but those lower volatility higher quality stocks tend to outperform so low volatility can protect on the downside. When the market rebounds, and in the recent history the speed of those rebounds has become faster and faster, there tends to be a relatively narrow dispersion in the performance of individual stocks. Those same low volatility, higher quality securities that protected on the downside, participate a lot in the upside, not necessarily 100 per cent, but they tend to have a healthy amount of participation in the upside.

For details on these stories, visit www.bpmmagazine.com

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