Simplifying risk management for defined benefit plans
Defined benefit pension plans are experiencing a paradoxical evolution. On the one hand, plan financial health has improved significantly in recent years, driven by strong stock market returns and more favourable interest rates. On the other hand, risk management has become more complex, exposing plan sponsors to more difficult decisions and increased risks if they react without careful planning. In this context, it is important to simplify the way risk is managed, in particular by strengthening decision-making discipline.
In 2025, the vast majority of Canadian defined benefit plans had a solvency ratio in excess of 100%1, with several even enjoying substantial surpluses. However, this favourable situation brings new challenges. Not only do sponsors have to preserve these surpluses, they also have to contend with persistent financial market volatility, fluctuating interest rates and heightened economic uncertainty. The temptation to react quickly to market shocks can then become a risk in itself, which can undermine the coherence of a long-term strategy.
Our white paper "Defined benefit plans: Simplifying risk management" provides more details on this topic, with key data, recommendations and proven solutions.
Defined benefit plans: Simplifying risk management
Download our white paperSimplification for better management
Complexity is now a risk factor in its own right. The number of possible strategies, tools and monitoring parameters can make decision-making much more complicated and make it harder for sponsors to act consistently. In this context, the aim is not to have access to more options, but to have a clear framework that makes it easier to make decisions when the plan’s financial situation changes.
Director, Annuities and Professional Services
Group Benefits and Retirement Solutions
Simplification requires structure. This means adopting a documented decision-making framework based on a limited number of genuinely decisive financial indicators, such as the solvency ratio, interest rate trends or the size of the surplus. These indicators become stable benchmarks around which decisions can be made.
The addition of threshold triggers then transforms financial information into concrete actions, taken consistently and at the right moments. This approach reduces the need for urgent decisions, improves predictability and strengthens plan governance.
Risk management tools
Risk management is based on a combination of complementary levers, which must be integrated into this structured simplicity. Liability-driven investment (LDI) is one of the pillars of this approach. . Instead of focusing solely on maximizing returns, this strategy uses liabilities as a “compass” to align asset behaviour with future plan obligations.
By reducing the sensitivity gap between assets and liabilities, particularly in the face of interest rate variations, liability-driven investment helps stabilize plan financial positions and improve their predictability. Implementation is generally gradual, based on clearly defined risk objectives, indicators monitored over time and a precise framework.
Alternative investments: Stabilizing returns
Alternative investments represent another important risk management lever. Distinct from traditional stock and bond markets, this type of asset—real estate, infrastructure, private credit or private equity—is based on return drivers linked to the real economy. Their low correlation with public markets allows plans to:
- Diversify their sources of returns
- Reduce overall portfolio volatility
- Generate more stable cash flow
Director, Annuities and Professional Services
Group Benefits and Retirement Solutions
The integration of alternative investments reduces portfolio volatility and improves financing stability compared with a traditional portfolio. This asset class:
- Generates regular cash flow (rents, tolls, interest)
- Is less sensitive to short-term stock market cycles
- Mitigates market shocks
Group insured annuities: Locking in risk at the right time
Finally, group insured annuities are used as part of a targeted risk transfer approach. When a plan reaches an adequate funded status and market conditions are favourable, annuity purchases help to “lock in” an advantageous financial situation. This strategy transforms an uncertain risk into a predictable commitment, whether through a gradual approach or a more complete transfer of obligations.
However, this is a decision to be taken strategically, based on risk tolerance, long-term objectives and a commitment to reducing future uncertainty."
Director, Annuities and Professional Services
Group Benefits and Retirement Solutions
Defined benefit plans are at a turning point. Although their financial situation has improved, they remain exposed to structural risks that could quickly wipe out the gains they have made.
The challenge is no longer simply to manage the current situation, but to protect it in a sustainable way. This involves clarifying objectives, clearly defining risk tolerance and drawing up a roadmap that simplifies the decisions to be made over time.
More than ever, the challenge for plan sponsors is not about doing more but about making better decisions.
1Median solvency ratio of Canadian DB pension plans reaches 132% in 2025: report | Benefits Canada.com