In a year that witnessed volatile markets and a plummeting Canadian dollar, 92 per cent of the plans on Benefits Canada’s top 100 pension funds list still saw an increase in their total assets in 2015.
The total average growth across the list was 8.2 per cent, with the positive increases ranging from the Canadian Imperial Bank of Commerce’s 0.7 per cent to the province of Prince Edward Island’s 21.7 per cent.
So how did these pension funds manage to win a losing battle?
Janet Rabovsky, a partner at consultancy firm Ellement, estimates the median asset manager, investing 60 per cent equities and 40 per cent bonds, would have earned 5.5 per cent in 2015. One of the drivers that could be credited for pension fund assets growing more than that, she says, is foreign assets that benefited from the 20 per cent depreciation of the Canadian dollar.
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“As the Canadian dollar fell in 2015 by over 20 per cent, pension funds with large allocations to non-Canadian equities [and] private assets denominated in foreign currencies did well,” she says. “I have clients invested in non-Canadian private equity, infrastructure and real estate who all saw returns in excess of 20 per cent for these asset categories, as well due in part to the depreciation of the Canadian dollar.”
Private market assets and pension contributions could also be contributing factors, adds Rabovsky, citing the Labourers’ Pension Fund of Central and Eastern Canada (No. 7 on the fastest-growing pension funds list at an increase of 15.4 per cent) as an example. “I know the Labourers’ pension fund has more than 30 per cent in private market assets,” she says. “I know [its] contributions exceed pension payouts by more than $400 million per year.”
The Nova Scotia health employees’ pension plan has an “unusual” investment strategy that does a “better-than-average” job of deploying its risk budget, according to chief executive officer Calvin Jordan. Still, he notes 2015 neither proves or disproves that assertion. “All that 2015 indicates is that funds with very different strategies can provide very different results, particularly over short periods,” he says.
The plan allocates 6.5 per cent to Canadian equity, which Jordan says helped it in relative terms since that was an area of negative returns in 2015. “Second, we allocate a lot to foreign assets without hedging the currency, which did very well in 2015 because the loonie weakened,” he adds. “Thirdly, we use leverage to allocate an unusual amount to domestic fixed income, which although flat in 2015, provided yield that exceeded the cost of leverage. Finally, our active managers contributed a little more alpha in 2015 than they usually do.”
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Since the top 100 pension funds ranking measures asset growth, funds like the Nova Scotia health employees’ plan with positive cash flow will tend to rank higher than those with negative cash flow, adds Jordan. “Again, this indicates nothing regarding the merits of the investment strategy.”
The fund’s total assets in 2015 were $6,6 billion, which represented an increase of 15.8 per cent in comparison to $5,7 billion in 2014. The province of Prince Edward Island, which was the fastest-growing pension fund in 2015, had total assets of $2.2 billion in 2014 and almost $2.7 billion in 2015. It attributes its 21.7 per cent growth to a fundamental change in its plan.
“We renegotiated on the liabilities side, which resulted in issuing some promissory notes,” says a spokesperson from the province’s Department of Finance. “There was no hidden value increase.”
The spokesperson adds that, like many plans across North America, the province’s public sector pension plan faces real challenges. As a result, the government developed a plan in 2013 to keep its workers’ pensions safe and affordable. “Beginning in 2017, annual cost-of-living increases will be awarded when the fund is able to pay,” says the spokesperson. “It is expected that, on average, indexation will be awarded four out of every five years. If sufficient funds are available, any missed prior years of indexation can be recovered in the future.”
Another factor behind the high growth across the top 100 pension funds, according to Rabovsky, is the age of many plans. “The plans that saw declines in their assets are likely mature and have more going out in pension payments than returns.”