Why Canadian pension plans aren't chasing growth right now

Canadian institutional investors have built some of the strongest pension systems in the world, and recent findings show they're not about to let market volatility undo that work.

Schroders’ recent survey of North American institutional investors found that 85 per cent of respondents expect greater market volatility over the next year, while 90 per cent of Canadian participants cited capital preservation as a priority - a figure Skelly said outpaced their US counterparts.

"Canadians are still very much concerned, probably more so than others, on downside protection. It's at the forefront of investors' minds,” said Michelle Skelly, head of Canada at Schroders. “This is where active management plays an important role.”

Capital preservation sentiment shifts from growth to protection

While the emphasis on capital preservation isn't new for Canadian pension plans, Skelly believes the reasoning behind it has shifted. She noted how funding ratios across the country's largest plans remain healthy and that’s exactly why plan sponsors aren't making dramatic moves.

Moreover, she suggests private markets remain central to the capital preservation playbook, noting Canadian plans are comfortable locking up capital for 10, 15, or even 20 years in exchange for steady, predictable returns, a tolerance that underpins much of their defensive positioning.

"They know that their funding rates are in a good spot. Rather than doing a big shift like retreating from the US because of concerns or making any erratic moves, it's really just managing and not being so reactive because they have that long term view," she said, underscoring that the Maple Eight’s strong funding ratios have been built through early adoption of private markets with a disciplined approach to diversification.

Passive exposure masks hidden concentration risk

That focus has taken on new urgency as equity market concentration has intensified. The dominance has shifted from the Mag 7 narrative to a broader AI-driven theme, with a small cluster of stocks driving an outsized share of index returns. For plans that moved into passive strategies to keep fees low, the risk is that broad index exposure no longer delivers the diversification it once promised.

"Asset class labels now are overestimating diversification," Skelly said.  "You don't want to lose out but you want to complement it," she said, adding the goal, as she framed it, is making sure the portfolio works as a whole, taking on a holistic approach and ensuring “the portfolio is doing what it needs to do to achieve the return. I think that's where you have to peel back the onion a little bit and that's where active management comes in."

AI-driven concentration reshapes portfolio construction

Still, Skelly acknowledged the AI trend has complicated portfolio construction across both public and private markets. Notably, redemptions and gates in Canadian real estate and private debt have been a wake-up call for plans that found themselves locked into concentrated positions, pushing them to seek out different return profiles and risk characteristics, she said.

Meanwhile, insurance-linked securities have drawn interest in their lack of correlation to broader markets, while European private equity and European real estate - particularly in industrials and logistics - have emerged as diversifiers.

Canadian allocators have been more willing than their US peers to move early on geographic diversification. Skelly said her American colleagues are slower to explore areas like European real estate, while Canadian plans have been comfortable leading the way.

Allocations to private debt are also rising, even as headlines about mass redemptions give some investors pause. The interest is concentrated in pockets like asset-based finance and European infrastructure debt that fit specific return needs.

"The focus on private markets, I think, is resilience," she said. "And it varies greatly whether you're looking at small mid market, large geographical dispersions."

Concentration risk drives portfolio rethink

According to Skelly, rather than pulling back from US markets over trade or policy concerns, Canadian plans are staying invested and managing risk around the edges. US dollar depreciation is a key concern across the industry, and currency hedging has become a bigger piece of the conversation.

The concentration problem isn't limited to US indices. Skelly noted that the TSX carries its own version, historically weighted toward energy and materials, and that every major benchmark — the S&P, MSCI, and others — faces the same issue.

Additionally, stretched valuations have made it harder for allocators to cut through the noise of strong headline performance and return to fundamental analysis. Plans that leaned on passive strategies for fee savings are now discovering hidden risks underneath those index-level returns and rethinking the approach.

That rethink is touching every part of the equity book, from small cap to large cap and momentum and value. Even the traditional core-satellite model is under review, with plans looking at whether their core holdings still reflect what they think they own.

She pointed to a structural shift in how plans categorize their investments, moving beyond the old public-versus-private split toward buckets like absolute return that reflect a more nuanced view of liquidity needs and risk characteristics.

Plans eye mid-cycle reassessment amid trade uncertainty

Looking ahead, Skelly expects the second half of 2026 to bring a wave of reassessment as plans scrutinize their passive holdings for concentration risk. Long-term investors who typically revisit their asset-liability studies every few years are now paying closer attention between cycles, driven by the constant drumbeat of trade wars and armed conflict.

Notably, Canada's energy and materials sectors have provided a natural buffer. What was once seen as a short-term supply-and-demand play is now being discussed in terms of longer-term contracts, Skelly suggests, which could draw more capital into domestic markets.

The broader message, as Skelly sees it, is that Canadian plans aren't retreating from private markets. Rather, they're getting more selective about where within them they deploy capital.

"Canadians are very happy to be the first ones to move around diversification geographically," she said.