are locked in, they are not subject to massive withdrawals or runs of the kind we witnessed during the financial crisis, such as northern rock or u. s. money market mutual funds. given these important differences from other market participants, pension funds have had, in general, a positive impact on financial stability. although not definitive, there is some anecdotal evidence that pension funds contributed to financial stability during the crisis by acting in a countercyclical fashion, buying assets when their prices fell. 9 recent challenges and responses in recent years, however, pension funds have encountered three major challenges that have affected their ability to play this stabilizing role. by far the biggest challenge faced by defined - benefits pension funds since the financial crisis has been the low level of long - term interest rates. low rates have increased the value of their liabilities and sharply reduced their solvency ratios, especially in the immediate aftermath of the crisis. these ratios have now partially recovered, as low interest rates have boosted equity prices, but interest rates are likely to remain relatively low for an extended period as the canadian and global economies slowly recover. 10 in their search for yield in this low interest rate environment, many pension funds have increased their exposure to alternative investments in real estate, private equity and infrastructure. given their long investment horizons, they are well suited to holding a portion of their funds in less - liquid assets to earn a liquidity premium. as long as the liquidity, market and credit risks associated with these investments are prudently managed, this is a positive development. 11 a second challenge is longevity. according to the canadian institute of actuaries, existing mortality tables based on the u. s. experience significantly understate canadian life expectancy by 2. 3 years for a 65 - year - old man and by 3. 3 years for a woman of the same age. as funds transition to the new canadian mortality tables, pension obligations could rise by as much as 7 per cent, although the typical increase will likely be in the range of 3 to 4 per cent. 12 clearly, a challenge of this magnitude, especially one that will likely persist or even increase, may not be fully addressed by asset - management strategies alone. in some cases, adjustments to contribution rates and benefit levels will be part of the solution. 13 pension funds that invest directly in real estate or infrastructure, for example, sometimes borrow against this collateral to help to finance their purchases or they may invest indirectly in related funds, whose managers

allow them to play a stabilizing role in our financial system. in addition to these challenges, pension funds will also have to adjust to major reforms to the global financial system that are currently under way. let me give you a brief overview of those reforms. financial reform and pension funds in the wake of the financial crisis, g - 20 leaders adopted a sweeping set of financial sector reforms to build a stable and resilient global financial system that will promote global economic integration and sustainable growth. 16 at the macro level, the reforms will make the global financial system more resilient to shocks. financial crises will be less frequent and less severe, which will clearly benefit pension funds as well as other market participants. at the micro level, pension funds will be affected by the implementation of four priority reforms : • the enhanced basel iii bank capital and liquidity framework ; • an effective resolution regime for financial institutions that are seen as “ too big to fail ” ; • requirements to reduce systemic risk in shadow banking ; and • rules and infrastructures for over - the - counter derivatives. basel iii since pension funds are low credit risk exposures for banks, the impact of the new basel iii capital rules on pension funds will be small. under the new liquidity rules, however, pension bank of canada, financial system review, ( december 2012 ) : 36 – 38. for example, long - short equity strategies. for more information, see c. severinson and j. yermo, “ the effect of solvency regulations and accounting standards on long - term investing : implications for insurers and pension funds ”, oecd working papers on finance, insurance and private pensions, no. 30, oecd publishing ( november 2012 ). http : / / dx. doi. org / 10. 1787 / 5k8xd1nm3d9n - en. the g - 20 ’ s four core reform priorities are : ( 1 ) to make banks safer ; ( 2 ) to end the problem of financial institutions that are “ too big to fail ” ; ( 3 ) to transform shadow banking activities into resilient market - based finance ; and ( 4 ) to ensure continuously functioning core financial markets. for an update on the reforms, see www. financialstabilityboard. org / publications / r _ 140411. pdf. bis central bankers ’ speeches funds may have to increase the amount and quality of the collateral supplied to banks for derivatives, repo and