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Canada’s public pension funds, among the biggest in the world, are piling on risk with leveraged bets in a chase for higher returns, Moody’s Investors Service warns.

The nation’s six biggest pension funds have increased their average leverage to 24 per cent, from 19 per cent in 2009, in an effort to offset the impact of declining pension member contributions and low interest rates on their cash flow and investment returns, Moody’s said in an Oct. 3 report written by analyst Jason Mercer. That’s leaving the funds exposed to volatility in the returns they’re counting on to fund future pension payouts.

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“They are definitely taking on more risk, and the question I ask them is, ‘Why take on more risk if you don’t need to?'” Mercer said by phone from Toronto. ‘Why not just invest in very low-risk securities and not worry about volatility?”

Long-term interest rates in developed countries are currently about half the 4 per cent real return pension plans need to remain sustainable. Canada’s biggest pension funds have been targeting returns in the double-digits with their use of leverage and investments in illiquid assets such as real estate, infrastructure, and private equity, to compensate for a lower ratio of active members to retirees drawing benefits, Mercer said.