There are a lot of reasons to believe financial markets will be very different in the next 10 to 20 years than what pension funds have been used to, according to Aaron Bennett, chief investment officer of the University Pension Plan, during a session at the Canadian Pension and Benefits Institute forum in Montreal last week.

“The sharp rise in inflation is leading us to consider making some changes to our portfolios sooner than we expected. I don’t think current inflation rates will last, but I also don’t think we’ll get back to the one per cent or two per cent rates we were used to before the [coronavirus] pandemic.”

In the short term, Bennett said he believes the end of pandemic-related disruptions and the gradual recovery of supply chains could help ease inflationary pressures. However, in the long term, he expects factors like demographic changes and de-globalization will create upward pressure.

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In order to meet obligations to pension plan members, plan sponsors must consider what asset classes work best for their specific portfolios, he said, noting traditional inflation hedging assets, like real return bonds and commodities are expensive, while alternative investments like real estate and infrastructure are illiquid and require investors to be opportunistic.

“There’s no such thing as easy money in real estate and infrastructure anymore. It’s already been done.”

Also speaking during the session, Asif Haque, chief investment officer at the Colleges of Applied Arts and Technology pension plan, was more optimistic about alternative asset classes. He noted his organization makes considerable use of real estate and infrastructure in its $18-billion portfolio.

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“These assets are still a big part of our long-term strategies, but we have to be more selective today and make sure we have good partners. In today’s environment, it’s also critical to understand the level of inflation sensitivity in each of our transactions.”

One potentially promising real estate investment opportunity in periods of high inflation — which the CAAT is investigating — is agricultural land, he said, noting it’s important for plan sponsors to keep a certain amount of cash at hand to take advantage of these opportunities.

Recent declines in equity markets have increased the relative weight of the CAAT’s illiquid investments, he noted, which is prompting internal discussions about dry powder levels. “How much cash should we keep in the fund? What should we sell first? Second? You don’t want to get to the point where you have to sell an asset at a terrible price.”

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