Will 2025 really be the year that pension sponsors in Canada rethink how they invest? That question matters because demographic shifts, higher interest rates, and a more complex regulatory and political backdrop are forcing funds to treat their mandate differently. This article lays out what matters when you compare options, examines the traditional approach many plans have used, explores modern alternatives that are gaining traction, compares additional viable strategies, and helps trustees or investment committees make pragmatic choices as the landscape shifts.
3 Key Considerations When Evaluating Pension Investment Strategies in 2025
What should you focus on when comparing different strategies? Start with three practical dimensions:
- Liability sensitivity - How exposed is your plan to interest rates and inflation? A defined benefit plan's funding ratio responds directly to changes in discount rates. Does the strategy reduce or amplify that exposure? Liquidity needs and cashflow matching - Can the plan meet benefit payments without forced asset sales? Illiquid allocations can boost return assumptions, but they complicate cashflow management during market stress. Net-of-fees expected outcomes - What returns are realistic after fees, implementation costs, and hedging expenses? Private markets and bespoke structures can promise higher gross returns, but net returns depend heavily on execution.
Ask yourself additional questions: How would a stressed economic scenario affect funding? Do governance and operational capacity match the strategy’s complexity? What does the plan’s time horizon realistically allow?
Why Fixed Income and Diversified Equity Have Dominated Canadian Pension Portfolios
For decades many Canadian pension funds relied on a foundation of bonds plus a portfolio of public equities. Why did that work? Pension liabilities were often discounted using long-term yields where bonds provided a natural hedge. Equities offered growth that outpaced inflation over long horizons. The approach matched standard actuarial assumptions and fit the governance capacity of most sponsors.
Pros
- Predictable liquidity and established valuation frameworks Relatively low operational complexity compared with private market strategies Transparent markets and benchmarking make governance straightforward
Cons
- Low bond yields in the prior decade compressed hedging options; interest rate risk remained a challenge Public equity markets can be volatile and correlated during crises, reducing diversification benefits when you need them most Passive exposure may dilute the opportunity to capture illiquidity premia or private market return sources
In contrast to earlier periods where low yields dictated aggressive equity allocations, the post-2022 rise in yields means fixed income now plays a different role. Longer-duration bonds look more attractive for hedging, while cash yields offer better short-term alternatives for liquidity management. That shift is prompting some sponsors to reconsider the pure equities-plus-bonds template.
How Private Assets and Real Assets Are Reshaping Allocation Decisions
Private equity, infrastructure, and real estate have moved from niche allocations to core portfolio components for many large Canadian funds. What makes them appealing? The promise of higher expected returns and cashflow generation can help match liabilities in a low-growth environment. But are they always the right answer?
What these assets offer
- Potential illiquidity premium that lifts long-term expected returns Revenue streams from infrastructure and real estate that can be matched to benefit payments Opportunities for active value creation and operational improvements
Trade-offs to recognize
- Valuation opacity and longer hold periods complicate funded status monitoring Higher commitment and monitoring costs; fund managers often charge substantial carried interest In stressed markets, selling private assets quickly is costly or impossible
Similarly, using private assets for liability hedging is tricky. In contrast to government bonds that move in predictable ways when rates change, a parking lot of private infrastructure projects will not reprice daily in response to macro shocks. That reduces the immediate hedging value, even if cashflows look attractive over time.
Advanced techniques: some sponsors use a core-satellite approach - core liquidity and duration hedging reside in tradable bonds and derivatives, while satellites target higher return drivers in private markets. Portfolio construction increasingly relies on dynamic rebalancing rules tied to funded status and glidepath triggers. Why? Because dynamic allocation helps capture upside in growth cycles while limiting downside exposure when liabilities widen.
Liability-Driven Investing: Is It Worth the Cost?
Liability-Driven Investing (LDI) focuses on aligning assets with liability cashflows and interest rate sensitivity. Is LDI a panacea or an expensive hedge? That depends on the plan's maturity and funding context.
When LDI makes sense
- For mature plans with a large proportion of retirees, where predictable outflows are dominant When sponsors want to reduce funded-status volatility to stabilize contribution requirements Where there is sufficient governance sophistication to manage derivatives, collateral, and basis risk
When LDI looks less attractive
- For younger plans with long liability duration and a higher proportion of active workers If implementation costs, collateral requirements, and counterparty exposure outweigh funding volatility benefits When interest rate hedges create mismatches with inflation-linked liabilities
In contrast to simply owning more long-term government bonds, modern LDI https://europeanbusinessmagazine.com/business/top-picks-for-bridging-loan-providers-in-2025/ structures may use swaps and futures to achieve duration cheaply. On the other hand, derivatives introduce counterparty and operational complexities that require careful oversight.
Comparing Other Viable Options: Factor Strategies, Cashflow Matching, and Dynamic Allocation
Should funds pursue factor tilts, cashflow matching, or dynamic allocation strategies? Each option carries distinct trade-offs.
Strategy Primary Benefit Main Risk Best For Factor tilts (value, quality, low volatility) Improved return-per-risk and diversification from market exposures Style cycles and tracking error to benchmarks Plans with long horizons and appetite for active factor management Cashflow matching Direct alignment of asset inflows with liabilities High cost to lock in exact matches; limited upside Mature plans with predictable payment schedules Dynamic allocation and glidepaths Ability to de-risk or re-risk based on funded status Requires disciplined rules and governance Plans seeking to smooth sponsor contributions over cyclesWhat about risk parity and portable alpha? They can improve diversification by equalizing risk contributions or separating alpha from beta. In contrast to straightforward active management, these approaches often require leverage or complex overlays that increase governance burdens and possible drawdowns during market dislocations.
How to Decide: Choosing the Right Strategy for Your Plan’s Maturity and Risk Tolerance
How should trustees decide between these options? The answer combines quantitative analysis and practical governance checks.
Step 1: Stress-test the plan across realistic scenarios
Model the funded status under alternative paths for interest rates, equity returns, default rates, and inflation. Which strategy keeps the employer contribution profile stable? Which strategy amplifies the chance of a shortfall during a recession?
Step 2: Match strategy complexity to operational capability
A sophisticated LDI program using long-duration swaps requires collateral management, counterparty oversight, and legal expertise. If your team lacks those skills, consider co-investment with experienced managers or a delegated implementation model. What governance changes will be needed if you adopt derivatives or private assets?
Step 3: Focus on net outcomes and fee transparency
Ask managers to show net-of-fees scenarios, including carried interest and transaction costs. How sensitive are returns to valuation multiples in private markets? What happens to fees if you choose secondary sales or early exits?
Step 4: Use glidepaths and rules-based triggers for de-risking
Rather than ad hoc changes, adopt pre-defined rules that shift allocations as funded status crosses thresholds. In contrast to discretionary rebalancing, rules reduce governance friction and keep emotional decision-making out of critical moments.
Step 5: Revisit asset-liability assumptions annually
Markets change. Are your discount rate assumptions still defensible? Does your demographic profile justify maintaining a long-equity bias? Similarly, have regulatory or tax changes altered your preferred instruments?
Advanced Techniques to Consider in 2025
Which modern tools can materially affect outcomes?
- Duration management with staggered swaps - use a ladder of interest rate derivatives to smooth collateral needs and reduce rollover risk. Structured private market access - combine blind-pool commitments with secondaries and direct co-invests to manage J-curve risk. Dynamic hedging overlays - calibrate hedge ratios to funded status, increasing protection as the plan matures. Factor blending - combine complementary factors to reduce style drift and expected drawdowns.
Can these techniques be implemented without blowing up governance? Yes, if you pair them with clear KPIs, delegated authorities, and third-party validation. Who will sign off if a hedging program requires additional collateral? What limits will you set for leverage?
Summary: Action Steps Pension Sponsors Should Take Before 2025 Ends
What practical moves make sense now? Here is a concise checklist for trustees and investment committees:
Run multi-scenario stress tests focused on interest rates, inflation, and growth shocks. Clarify your plan’s time horizon and liquidity needs; align allocations accordingly. Assess operational readiness before adding complex instruments or private allocations. Demand transparent, net-of-fees projections from managers and consider fee renegotiation where possible. Adopt rules-based glidepaths for de-risking tied to funded status thresholds. Review governance and counterparty processes for derivatives and secondary markets. Re-evaluate your actuarial discount rate methodology to ensure consistency with investment assumptions.Which moves are highest priority? Start with scenario analysis and governance upgrades. Those steps influence the viability of every subsequent decision.
Final Thoughts: How to Navigate Hype and Focus on the Numbers
Many narratives suggest 2025 will usher in wholesale transformation for pension investing. In contrast to dramatic claims, real change is incremental and driven by measurable shifts - yield levels, demographic maturity, liquidity needs, and governance capacity. Which of your assumptions can be tested with data? Which depend on managerial skill or market access?
Ask sharp questions: Are promised returns realistic given current yields and cost structures? How does each strategy affect contribution volatility for sponsors? Can you live with the liquidity profile of private assets if a market stress forces early liquidity? In pursuing higher returns, are you introducing hidden sources of risk that undermine liability matching?
In summary: avoid one-size-fits-all answers. For some mature plans, a stronger tilt toward LDI and cashflow matching will reduce funded-status volatility. For others, selective private asset exposure combined with dynamic allocation rules can improve long-term net returns. The difference lies in matching strategy to liability profile, operational capability, and realistic net-of-fee expectations. Will your plan be ready for 2025? The best indicator is whether you are asking the tough questions now and building the governance to answer them.