Largest Canadian pensions should maintain Fitch ratings through crisis: report

Canada’s 11 largest pension funds should be able to maintain their current credit ratings through ongoing market turmoil, according to Fitch Ratings Inc.

Nevertheless, return expectations are under significant pressure from the economic fallout of the coronavirus pandemic, said the ratings agency in a new report. “Fund performance will depend on asset mix, which is largely influenced by a plan’s maturity and risk appetite.”

The Caisse de dépôt et placement du Québec and the Ontario Municipal Employees Retirement System are both maintaining their AAA rating, reflecting their structural strength.

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“Canadian pension plans generally increased their exposure to private assets in recent years, including private credit, private equity, real estate and infrastructure investments, to capitalize on the illiquidity premium,” noted the report. “Real estate and infrastructure investments can also provide an inflation hedge and, potentially, recurring income. While the illiquidity of these investments can lead to higher returns, they can also yield more concentrated exposures to individual companies or sub-sectors if not carefully managed.”

In terms of asset mix, the country’s largest pension funds vary significantly. The Healthcare of Ontario Pension Plan holds the largest percentage of fixed income (61 per cent) among the group, as well as the smallest percentage of private equity (eight per cent). The Ontario Teachers’ Pension Plan is tied with the Alberta Investment Management Corp. for the smallest percentage in infrastructure (6.93 per cent), while the OMERS holds the most (19 per cent) followed by the Public Sector Pension Investment Board (14.85 per cent).

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Meanwhile, the Investment Management Corp. of Ontario holds the largest percentage of private equity (16.83 per cent). The British Columbia Investment Management Corp. holds the largest portfolio percentage of public equities (41 per cent), while the OPSEU Pension Trust holds the smallest proportion (six per cent) but is the most heavily allocated to real estate (27 per cent), closely followed by the Canada Pension Plan Investment Board (22 per cent).

Given the drastic market downturn, if Canadian pensions are able to take advantage of the dislocation in asset prices, it will support their overall long-term viability, noted the report, which is likely as these investors entered the crisis with significant cash on hand.

“Liquidity is exceptionally strong for the Canadian pension plan peer group, with most having sufficient cash and short-term investments to repay all outstanding debt,” said the report. “As such, these plans can take advantage of investment opportunities when available, rebalance portfolios as necessary, meet margin calls on derivative transactions, refinance debt maturities when access to the capital markets is unavailable and fund current pension obligations.”

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