A recent survey by Pyramis Global Advisors showed that “only 60% of Canadian pension managers predict they will successfully achieve their annualized target return”. This target return is, on average, 6% annually. This is forcing many pension managers to rethink their investment strategies. The most common shift has been toward liability-driven investment (LDI) models, which “involve choosing assets with long time frames, such as real estate, that have payouts that match the long-term nature of pension obligations”. Most pension managers seem to believe that this switch will help them meet their target returns.

From my perspective, the major problem with these target returns is that, on average, they’re simply too high. 6% seems overly optimistic and frankly, not possible given the current economic climate. A recent report by the Organisation for Economic Co-operation and Development (OECD) showed that, between 2001 and 2011, the average annual investment return was well below 4%. How can these pension planners somehow achieve the 6% mark? Do they really think that a simple switch to LDI models will accomplish that?

What do you think?

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