Mercer predicts opportunities in 2009

While some have described 2008 as a roller coaster ride, pension consultant group Mercer compares it to a big jump off a steep cliff. In light of that, it’s not surprising that Mercer’s 2009 Fearless Forecast predicts a “soft year for the economy.” However, while expectations for 2009 are low, they are not dismal and, some positive investment opportunities exist.

“While there is no doubt that the economic and financial environment will remain difficult, managers are expecting some signs of life in the markets in the near-term and believe the seeds of recovery will germinate this year,” said Jaqui Parchment, director of consulting for Mercer’s investment consulting business this week at the Toronto Board of Trade.

According to Mercer’s forecast, equities are expected to have a modest recovery in 2009 and be the most attractive asset class. “The median annual return forecast for equity markets came in at around 10% across the board,” Parchment confirms.

Additionally, bonds are also expected to produce moderate returns, with corporate bonds being the best performing segment in the Canadian fixed market.

“As a whole, the main message for the markets is that a sluggish recovery is largely expected in 2009, followed by moderate growth in the years to follow,” concluded Parchment.

Clients with employer-sponsored pensions may be concerned about the solvency of their plans, many of which were hard-hit by the market meltdown in Q4 of 2008. Mercer provided some insight to what 2009 might hold.

DB opportunities Despite recent market performance and the expected slow recovery, Parchment insisted that there were some opportunities for defined benefit (DB) plan sponsors. “For plan sponsors that wanted to enforce a hedging policy but had market-timing concerns, now may be a reasonable time to consider implementation,” she suggested.

Parchment added that before plan sponsors make changes to their investment strategies they should ask themselves four key questions: • Do I believe there are opportunities that are worthwhile? • Given the current financial status of the plan and economic realities the organization is facing, does the fund have the capacity to take on more risk? • Can I adopt a “no regrets” policy and focus on the opportunity exploited and not what could have been? • What is feasible given the fund’s size and characteristics?

“With these issues in mind, we think that sponsors may be able to categorize themselves in three different ways and develop a plan for…rebalancing,” said Parchment. “Plans in all categories should consider moving into real return bond and implementing a hedging policy, if these policies had been decided on in the past but was delayed due to market timing.”

DC Actions Since the investment risk is borne on the plan members, as opposed to the plan sponsor in defined contribution (DC) plans, the challenges facing DB sponsors may also impact DC members. The top three suggestions that Mercer had for DC plan sponsors were: • Confirm if investment and administration fees are reasonable — are you getting the best fee deal possible for your members? • Confirm that all investment funds, including the default, are still appropriate, • Consider target date funds as a means to help improve member investment decisions.

“2008 marked a year of extreme volatility, affecting essentially all markets around the world,” said Parchment. “Sponsors must work within the plan’s risk tolerance framework when making investment strategy decisions. At the same time, they should build in the flexibility to grab the right investment opportunities going forward.”

BenefitsCanada.com is the sister site of Advisor.ca, covering the pension and benefits industry.

(01/15/09)