Canadian pension funds are taking aggressive steps to address widespread pension under-funding according to a new report from financial services consulting firm Greenwich Associates.

The report says pension funds are increasing their investments in foreign stocks and alternative investments, and hiring new investment managers.

“Corporate and public pension plan sponsors in Canada are looking to ensure their ability to generate enough asset growth to raise their solvency ratios to more comfortable levels,” says Greenwich Associates’ Toronto-based consultant Lea Hansen. “To that effect, they are working to generate incremental returns from core asset classes, they are investing in alternatives, and in both cases, they are bringing in new specialty managers to carry out these strategies.”

A new report from Greenwich Associates reveals that solvency ratios have been falling steadily among Canadian pension funds for the past four years. After hitting 112% in 2000, average pension fund solvency ratios have dipped to 95% in 2004, it reports.

In their effort to bolster overall portfolio returns, Canadian institutions are focusing in large part on international equities and alternative investments, it says. Even though the 30% limitation on foreign securities is still in force, Hansen notes that Canadian funds still have some leeway to further increase foreign investment. “The ‘global’ total in EAFE, U.S. stocks, and international bonds, is still only 26.1% of total assets this year, so they could invest another $30 billion in foreign securities if they believe they can get better returns that way,” she says.

Canadian institutions also expect to maintain the current strong growth trend in allocations to alternative asset classes, such as private equity and hedge funds. Canadian plan sponsors now have $20.1 billion invested in private equity, up from just $6 billion in the year 2000, $8 billion in 2001, and $14.6 billion at the end of 2002. While hedge fund allocations round off to just 1% of total institutional assets for both 2002 and 2003, the absolute amount invested jumped to $8.8 billion from $6 billion over the period — an increase of almost 50%. Looking ahead, the number of Canadian institutions expecting to increase their alternative asset allocations outnumber those expecting declines by a wide margin — especially with regard to hedge funds, Greenwich reports.

Last year, Canadian institutions told Greenwich Associates that they were planning large increases in their manager hiring in 2004. In reality, their hiring vastly outstripped even these aggressive expectations over the past 12 months, and Canadian institutional investors are now hiring new managers at a pace seldom seen in Canada. The increase in hiring has been accompanied by a corresponding growth in manager terminations.

Greenwich also reports that average total cash compensation for Canadian plan sponsors in 2003 was $163,900. Average salaries rose by nearly 3%, from $116,300 in 2002 to nearly $120,000 in 2003, and bonuses increased slightly at a similar rate to $44,300.