Withdrawal of real return bonds could financially impact DB pension plans: CIA

By: Julius Melnitzer | January 21, 2023

The Canadian Institute of Actuaries is urging the federal government to reconsider its cessation of real return bond issuances, citing the potential financial impacts to defined benefit pension plans.

“We request not only that the decision to cease issuing real return bonds be reconsidered, but also that the annual issuance of real return bonds be eventually increased, as the current level of approximately $1 billion is not sufficient,” wrote CIA president Hélène Pouliot in a letter to Finance Minister Chrystia Freeland. “In the meantime, we would also request that the $3.8 billion of real return bonds held by the Bank of Canada be sold into the market in an orderly fashion to promote liquidity.”

The CIA estimates that roughly $1 trillion in registered DB plan assets, which cover more than three million plan members, are tied to inflation-linked benefits, wrote Pouliot. Pension plans with inflation-linked benefits use real return bonds as liability-matching assets to hedge against inflation risks. They also use these bonds to determine commuted values to which members are entitled.

“Real return bonds provide an ideal inflation-linked hedge and also provide a benchmark for the break-even inflation rate implicit in yields from government bonds,” says Dean Newell, vice-president at Actuarial Solutions Inc. “This break-even rate tells us what the market thinks about long-term inflation, which is used as a building block in the discount rate assumption we use to value liabilities and also to determine lump-sum payments for indexed-plan members who opt not to defer their pensions.” MORE

Julius Melnitzer is a Toronto-based legal affairs writer, ghostwriter, writing coach and media trainer. Readers can reach him at [email protected] or https://legalwriter.net/contact.

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