How CN Rail pension, ATRF tackled liquidity as markets crashed

When the coronavirus pushed equity markets off a cliff, Canadian defined benefit pension plans had to mobilize to address a number of concerns.

The Canadian National Railway Co. pension recently shifted towards a more defensive investment strategy, said Marlene Puffer, president and chief executive officer for the CN investment division of the company, at a webinar hosted by the Association of Canadian Pension Management last week.

As a very mature plan, with about $18 billion under management, it pays out around $1 billion each year, she noted. “Being a corporate plan that’s federally regulated — solvency matters. So we were well positioned for this kind of situation. Obviously, we didn’t predict the pandemic, but we were concerned about equity valuations. And we were concerned about interest rates falling further, so we shifted our asset mix to have additional interest rate hedging in place. And we also had in place a sophisticated downside protection program related to the equity markets . . . and shock absorbers within almost every asset class that we have. And with that, we came through this period quite strongly.”

After making it through a dramatically difficult couple of quarters, the CN Rail plan’s return for the year is still in the green, added Puffer. “It seems strange to be talking to my members and saying, ‘I’m delivering a modest, positive number and I’m very excited about that.’ But that’s exactly where we are.”

Prior to the pandemic, she noted, the plan addressed its traditional home-bias in its equity portfolio and switched to using an all-country world index as its benchmark portfolio. “At the time, we really thoughtfully did that with the thought that, should there be any form of crisis in the global economy, it would be a defensive play relative to our previous positioning.”

Unhedged U.S.-dollar exposure also boosted the plan’s returns through the crisis as the U.S. dollar appreciated, boosting equity returns in local currency terms here in Canada.

In addition, as the crisis roiled through markets, the plan had sufficient liquidity to take on some rebalancing efforts, said Puffer. “The good news is that means, as equities were falling, we were actually buying and as equities would recover, we would sell a bit at these sorts of mini peaks. So that activity over the past couple of months has added value to our fund.”

In order to perform this strategy, the plan had to manage its liquidity concerns very carefully, she added, noting that, while the fund has made rigorous use of derivatives as a method of liquidity management for some time, other factors came into play. “It was important though that, for example, our government of Canada portfolio was almost unencumbered coming into the crisis and was our source of extra liquidity through the repo market. And the Bank of Canada stepped in as well to offer pension plans direct access. That was important as a second backstop to give us additional reassurance that, should we need some additional liquidity, it was easy to access.”

Liquidity was notably less of a concern for a less mature plan like the Alberta Teachers’ Retirement Fund, said Derek Brodersen, its chief investment officer, also speaking during the webinar. While the ATRF is about the same size as the CN Rail plan, it still has net cash inflow of about $300 million a year. “That’s really helpful in a stressful market because we actually don’t need to sell anything to pay pensions because we’re actually collecting more money in contributions than we need to pay every month.”

Nevertheless, he said, aspects of the portfolio required careful managing in terms of maintaining adequate liquidity. “We have a lot of unhedged exposure to foreign markets. Our public equity portfolios and our private equity portfolio is entirely unhedged, but some of our private market asset classes, we’ve hedged those back to Canadian dollars by policy. As the Canadian dollar fell, we needed liquidity to fund some of those currency hedges.

“We spent a lot of time thinking about that and how we could ensure we had available liquidity without having to impact our asset mix in any meaningful way — without having to sell something we didn’t want to sell. And I think we managed to do that pretty effectively. We tapped the repo market when it was still available and made sure we had lots of liquidity.”