Economic activity in most countries has severely contracted due to the current pandemic. Global gross domestic product (GDP) is forecast at –3 percent in 2020, with individual countries, including Canada, expected at –6 percent. Central banks have responded by lowering their key lending rates to almost zero in most countries.
Pension plan sponsors are reviewing their strategic asset mix, including their allocations to fixed-income instruments. While bonds are considered the asset that best matches a pension plan’s liabilities, it is hard to justify making additional allocations when the 10-year bond yield is hovering between 0.50 percent and 0.75 percent in North America and is even less than that (and in some cases negative) in some countries.
Not surprisingly, pension plan sponsors are grappling with how best to structure their liability hedging portfolio going forward and are considering adding other quasi–liability matching asset classes such as real estate