The Toronto Transit Commission Pension Fund Society has been reminded of the importance of liquidity during the coronavirus pandemic, according to Sean Hewitt, the fund’s chief executive officer, during a virtual roundtable hosted by the Canadian Pension and Benefits Institute on Thursday.
“COVID-19 was a really interesting test study in liquidity,” he said, noting the TTC plan conducts a liquidity budget test annually to ensure it’s able to pay pensioners under dire circumstances. The previous test case was the 2008 global financial crisis, but the economic uncertainty wrought by the pandemic has become the new litmus test for the worst-case scenario.
There was a period of time when even high-functioning bond markets weren’t operating the way they should, said Hewitt, pointing out alternatives, particularly, real estate, private equity and infrastructure aren’t assets easily liquidated in a pinch. He advised plan sponsors to ensure their strategies involve a mix of highly liquid and illiquid investments to achieve long-term sustainability.
The TTC pension plan has been investing in alternatives — mainly through real estate — for the past few decades. However, the process to invest in some alternatives, such as private real estate or infrastructure, can be slow going, he said, noting it takes time to fully implement a strategy and the approach must be regularly reconfirmed. While these strategies may take more time, the delay can allow plan sponsors the opportunity to build a foundation and confidence in a long-term approach and relationship, which is often the TTC pension plan’s goal.
The plan has invested in infrastructure since 2015, with a target of investing eight per cent (roughly $1 billion) of its plan assets; however, Hewitt says he doesn’t foresee these assets fully meeting their strategic weight until at least 2022. One exception was a significantly long-term investment the plan made into digital infrastructure in 2018, including data centres and cell towers, the returns of which were accelerated by the pandemic this year.
When determining alternative strategies, Hewitt advised plan sponsors to start by reviewing their objectives, suggesting they consistently review objectives and performance, then incrementally find ways to improve chances of success.
A strong governance framework makes a difference, so to ensure decisions are always aligned with the plan’s objectives, he encouraged plan sponsors to take the time required to vet decisions or empower staff or service providers to assist in this area when developing a complex strategy.