Balancing Pension Fund Assets and Liabilities

GATINEAU-OTTAWA, QUEBEC, CANADA, September 12, 2010 (Press-News.org) Interview with: Josephine Marks, Managing Director - Pension Assets, Scotiabank Group Treasury

Investors need to ensure there is a strong relationship between pension fund design and investment strategy, says Josephine Marks, Managing Director - Pension Assets at Scotiabank Group Treasury. If that link is not strong enough, there could be an increased risk of the fund being unable to meet benefit obligations. The Chairperson at the Canadian Institutional Investment Summit 2010, taking place in Gatineau-Ottawa, Quebec, October 25-27, explores the causes of asset and liability imbalances, and how fund directors can put it right.

What are some of the issues challenging institutional investors in Canada?

Josephine Marks: As we look at the demographics of the population, we realize that attention must be paid to the pension frameworks that are in place. In Canada, the pension regulatory environment is currently being debated. Some people are suggesting major overhauls, others are proposing minor revisions, but overall there are a lot of discussions around how we can deliver pension benefits to our aging population.

The choice of pension framework determines the level and type of risk that will be assumed to provide the benefits.

The other major challenge is that we have continued uncertainty in capital markets, both in terms of the outlooks for equity markets as well as expectations for the future direction of interest rates and inflation. These may be some of the most challenging times ever for pension fund managers.

Canadian institutional investors need to realize the importance of good risk management, the necessity to better understand and be aware of the risks that are inherent in their portfolios, and how they can be managed better relative to plan design.

What risk mitigation strategies would you recommend?

Josephine Marks: Step back to the basics if you are managing a pension fund or any pool of assets, which is to provide benefits to members. Be sure to apply risk management principles and knowledge to the plan design, to ensure that the risks being taken are consistent with the plan design objectives. If that link between design and risks is not strong, you may end up with some disconnects.

One critical tool to manage these disconnects is the investment strategy which should be reviewed periodically in light of market conditions and plan design parameters. Develop a strategy that manages risks between the assets and liabilities, and this is where the concept of liability-driven investment may help. Recognize that there are many investment policies and strategies, and no "one size fits all" solution. Develop a strategy that has the right combination of risk and reward trade offs for the institution or entity under management.

What investment strategies would you suggest?

Josephine Marks: Risk management through diversification is important, but along with that comes the risk of excessive diversification. It has become evident that investors should only invest in products they understand, and that they should take into account the complexity of their investments and the depth of their resources. Investments should reflect their tolerance for risk and complexity, and liability-driven investing will make sure their assets are well suited to their liabilities.

What is your outlook for the future?

Josephine Marks: From a federal and provincial level, there has been a lot of national consultation on pension reform, and policy makers need to make others aware of what may come out of those discussions. There have been concerns expressed about coverage and replacement ratios, so legislation may address the merits of defined benefit versus defined contribution plans.


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About the Canadian Institutional Investment Summit 2010

This unique forum will take place at the Hilton Lac-Leamy, Gatineau-Ottawa, Quebec, Canada, October 25-27, 2010. Offering much more than any conference, exhibition or trade show, this exclusive meeting will bring together esteemed industry thought leaders and solution providers to a highly focused and interactive networking event. The summit includes presentations on risk management, the outlook on the fixed income market, and liability driven investment strategies.

For more information please send an email to info@marcusevanscy.com or visit the event website at http://www.ciisummit.com/JosephineMarksInterview

Please note that the summit is a closed business event and the number of participants strictly limited.

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