Despite adjustments to operations and investments during the coronavirus pandemic, Canada’s major pension plan leaders are maintaining a long-term view by looking ahead to a post-pandemic world.
But we’re not out of the woods yet as Canada, and the rest of the world, are likely many months away from reaching herd immunity and thus life and business can go back to normal. Just over one year ago on March 11, 2020, the World Health Organization declared the coronavirus a global pandemic and normal life ground to a halt. By the end of last March, all Canadian provinces and territories, along with most of the world, had declared some form of a state of emergency and lockdowns.
At the onset of this once-in-a-century public-health crisis stock markets were, like the rest of society, rattled. In the lead-up to and the immediate aftermath of a global pandemic being declared, the value of Canadian firms trading on the Toronto Stock Exchange fell sharply in February and March 2020. The S&P/TSX Composite index dropped by 37 percent between February 19 and March 23, 2020 — the date the index hit its lowest point during the coronavirus crisis, according to the Bank of Canada. But, the TSX and other stock markets have since mostly recovered, with the Bank of Canada noting in an October 2020 article: “Surprisingly, global stock markets, including the TSX, have recovered most of their losses. By the end of August 2020, the TSX index showed a decline of around less than 10 percent since February.”
And some of Canada’s leading pension plans have also mostly recovered since that stock shock last February and March.
While the pandemic has unevenly impacted the fortunes of different sectors, pension funds are looking at their investments through a long-term lens while taking cues from past crises, says Dale MacMaster, chief investment officer at the Alberta Investment Management Corp. He cited the example of the AIMCo’s investments in airports, which were growing at an annual rate of five per cent until the coronavirus put the brakes on the travel industry. “We expect much like after Sept. 11, 2001, it’ll reaccelerate.”
In another nod to the past, MacMaster says the response of governments and central banks was taken directly from the playbook created following the 2008/09 financial crisis, by quickly pouring liquidity into the market and providing government support. “If you look at the one-year anniversary of when equities markets bottomed out last March, we’ve seen these markets go 70 per cent to 100 per cent from the bottom. That’s based on the successful deployment of support and liquidity that governments around the world put into place.”
And he says the relative resiliency of Canada’s major funds speaks to the strength of the model. “We’re long-term investors with liquidity and the means to take advantage of these situations as we did in March. We had ample liquidity despite the stresses and were on the hunt for attractive assets in a dislocated market. That’ll always be our playbook. We’re long-term investors and we have a list of equities we like to buy and a list of assets we’d like to have.”
James Davis, chief investment officer at the OPSEU Pension Trust, says the crisis has highlighted the adaptability of the fund’s employees in evolving situations. “I remember during the first few days out of the office, the first team to begin working from home was our capital-markets team. They’d never done anything like that before and it was incredible to see how well that team transitioned and was able to manage the overall liquidity in the fund and execute the bond market and the currency and derivative markets as if they’d been sitting side by side. They adapted seamlessly.”
He says in regards to private equity, the pandemic also demonstrated the importance of strong partnerships between pensions and investees when making deals remotely. “Think about the traditional due-diligence process. It’s very human and high touch. That’s where if you’ve got trusted partnerships, we know they’ve got the same interests we do and we can trust them if they’ve got boots on the ground.”
The pandemic also accelerated several existing trends such as e-commerce and remote work, prompting pensions to adjust investments accordingly, he says, with the OPTrust making increased allocations in logistics, data centres and cold storage.
The public-health crisis and ensuing financial fallout had an uneven impact on pension funds’ 2020 financial results. While the Caisse de dépôt et placement du Québec reported a 7.7 per cent return on its depositors’ funds in 2020, 1.5 per cent lower than its benchmark, the Ontario Municipal Employees Retirement System said the pandemic and subsequent lockdowns resulted in a net return of -2.7 per cent for the year.
Meanwhile, the Colleges of Applied Arts and Technology’s pension plan is currently 119-per cent funded on a going-concern basis with a funding reserve of $3.3 billion, based on its latest actuarial valuation as at Jan. 1.
Asif Haque, the incoming chief investment officer for the CAAT pension plan, says the plan maintained its long-term investment perspective when making investment decisions, something that continued over the course of 2020 toward its long-term targets in private markets and active-management structure in public markets.
“Our liquidity situation risk processes were very strong and we applied them and they worked well through the crisis. Where our processes worked well, there’s always something you can learn from how exactly a crisis unfolds so you can hopefully be ready for the next one.”
Haque says pension plans are also planning for future inflation in the market. While estimates vary on when exactly inflation rates will increase, he says the CAAT pension plan’s asset mix has already built-in some inflation sensitivity and will re-examine that mix going forward. And while fixed income yields have remained subdued amid a low-interest rate environment, he says there’s still a place for it in the CAAT’s portfolio.
“We’re still reviewing how to make that portion of the portfolio work harder for us. The overarching point is that we’re cognizant of how low yields are in the marketplace and thinking how best to react to that, in a world where we want to have a very-diversified portfolio. It’s about using that portion as wisely and efficiently as possible.”
This is the fourth and final part of a series of articles running this month that’s diving deep into how the benefits, pensions and institutional investment industries have changed in the year since a global pandemic was declared.
Read the first story in the series here: One year later: How the pandemic sped up the shift to virtual mental-health care
Read the second story here: One year later: Why employers should create ‘water-cooler’ moments for employees amid the pandemic
Read the third story here: One year later: Institutional investors looking beyond pandemic