June 11, 2024 — With funding levels at historic highs, Canadian pension funds are pushing into private investments and alternative asset classes with the potential to diversify portfolios and boost future investment returns. 

Rising interest rates have provided a huge benefit to pension funds in Canada and around the world. In the arcane math used to determine pension fund health, rising interest rates increase the “discount rate” used to determine how much it will cost to fund future liabilities. As a result, as rates rise, the future costs of pension liabilities fall, increasing the funding ratio. 

Just a decade ago, with interest rates near historic lows, the average funding ratio for Canadian corporate pension funds was 89%, according to data from the annual Coalition Greenwich Voice of Client Canadian Institutional Investors Study. For public pensions it was 84%. In 2023—the most recently reported data—Canadian corporate funds reported an average funding ratio of 117%, and public funds were funded at an average 116%. 

“In addition to providing security and comfort for plan participants, robust funding ratios give pension funds flexibility,” says Todd Glickson, Head of Investment Management – North America at Coalition Greenwich. “In Canada and around the world, we’re seeing fully funded pension funds take steps to shore up their plans and reduce future funding risk.”

Pension funds and other institutional investors in Canada are making a dramatic change to their portfolios by expanding allocations to alternative investments and shifting sizable amounts of assets to asset classes like private equity and infrastructure. A decade ago, the group of major alternative asset classes including hedge funds, private equity, real estate, infrastructure and private debt made up less than a quarter of institutional assets in Canada. In 2023, those asset classes combined to make up 41%. 

“Canadian institutions are making big investments in private debt,” says Todd Glickson, pointing to an increase in average allocations from 4% to 6% of total assets from 2022 to 2023. “Allocations last year also increased one percentage point to 10% for infrastructure, another alternative asset class with the potential to diversify portfolios, protect against inflation, mitigate volatility and, hopefully, enhance returns.”

The Coalition Greenwich Voice of Client - 2023 Canadian Institutional Investors Study analyzes changes in the investment strategies and portfolios of Canadian pension funds, endowments and foundations, and examines key trends such as institutional hiring expectations for asset managers, the use of sustainability and DEI, and the evolving nature of institutional investment management relationships.