Top 100 Pension Funds Report: Bouncing back

Markets have rebounded and pension plan assets are going along for the ride, but challenges still remain

The past few years for the pension industry have been difficult, to put it mildly. But for the Top 100 pension plans, things are starting to look up. Pension assets have cracked the $800-billion mark for the first time ever and are closing in on $900 billion. Assets climbed nearly 10%, with a number of plans reporting double-digit increases. And there was just one plan that reported a decline in assets, compared with 26 in 2011.

According to Mercer’s Pension Health Index, Canada’s pension plans were about 82% funded at the end of 2012, up from 76% in 2011. The firm recently revised the methodology for the index, which now includes the impact of deficit funding contributions. Some of those gains were because companies were throwing in money to fund their deficits.

Making additional contributions to pension plans has been a priority for many plan sponsors as they try to improve the funded status. BCE (No. 11 on the Top 100 Pension Plans list) made a $750-million voluntary contribution in 2012 to its plan in order to reduce the future pension obligation.

Read: Top 100 Pension Funds Report: A retrospective

Also, Canadian National Railways (No. 14) contributed $700 million to its plan last year, on top of $635 million in voluntary contributions since 2010.

Pension plan points

Ontario Teachers’ Pension Plan (No. 1)
Teachers’ owns Impark, which leases or manages more than 2,000 parking locations, consisting of more than 400,000 parking spaces, in more than 25 markets in Canada and the U.S.

OMERS (No. 2)
OMERS division Oxford Properties owns resort hotels in British Columbia (Whistler); Alberta (Banff, Lake Louise and Jasper) and Quebec (Montebello).

Healthcare of Ontario Pension Plan (No. 3)
At the end of 2012, HOOPP had more than 274,000 active members and pensioners, and 399 participating employers, and it was 104% funded.

PSP Investments (No. 4)
PSP Investments manages funds for the pension plans of the Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force.

The Road to Wellville
“What’s interesting is that 2013, so far, has been an excellent year for plans,” says Manuel Monteiro, a partner with Mercer. He estimates that the index had climbed about nine percentage points to 91% in the first five months of the year as a result of a rebound in global stock markets and an uptick in long-term interest rates. “This year sort of looks like 2009, and we’re seeing a pretty strong recovery at the moment.”

The market rebound has helped a few plans recover somewhat. Air Canada (No. 18) announced in March that its pension deficit dropped by half a billion dollars to $3.7 billion because of a better-than-expected return on its assets. The airline was also granted some relief by the federal government to fund that deficit. Air Canada’s mandatory contributions were reduced to $150 million a year—on top of its current service payments—for the next seven years.

The Office of the Superintendent of Financial Institutions (OSFI) estimates that the solvency ratio of the approximately 400 plans it supervises has also ticked up. It calculates that about 90% of federally regulated DB plans were underfunded on a solvency basis at the end of 2012, compared with 92% at the end of June 2012. And OSFI estimates that the number of plans with a solvency ratio below 0.80 also improved, declining to 61% from 68% in the same six-month period.

Investment Strategies
Many plans have looked at alternative assets and strategies as a way to boost their returns. “One of the things that’s really well established within our organization is the move into alternative asset classes,” says Bill Hatanaka, president and CEO of OPSEU Pension Trust (No. 15), also known as OPTrust and one of just a few fully funded plans in Canada. “We have been relatively early adopters of moving into the real estate, infrastructure and private equity spaces. And it’s proven to have worked well for us.”

Its infrastructure portfolio returned 23.7% in 2012, while private equity and real estate also produced strong results, returning 20.5% and 17.9%, respectively.

The Nova Scotia Health Employees’ Pension Plan (NSHEPP) (No. 44) has benefited from the use of a liability-driven investment strategy (LDI), which has helped shelter it from a decline in interest rates.

“And that’s been very much related to the happy timing when we put in place the key elements of our LDI strategy,” explains Calvin Jordan, CEO of NSHEPP (formerly known as the NSAHO Pension Plan). “Today, we have less-significant solvency issues than many pension plans, because over the last five years our investment returns kept pace with much of our solvency liability growth.”

Ups and Downs
While a lot of the news has been positive for plans lately, there are still issues they have to tackle. Volatility is still king as equity markets have gone all over the place.

Over the past few years, markets have taken plan sponsors on a roller-coaster ride. The S&P/TSX composite index topped 15,000 back in June 2008 and then proceeded to fall by half over a period of nine months. While the index did get back to 14,000 in 2011, it has dropped about 10% from that level by the end of May of this year. South of the border, the S&P 500 hit a new high in 2007, dropped by more than 50% by March 2009 and bounced back to reach record levels numerous times this year.

Low bond yields are another challenge for DB plans. “The fact that interest rates are so low right now really has an impact on the pension liabilities,” explains Will da Silva, senior partner and national leader, retirement practice with Aon Hewitt Canada. “Until we see some upward movement in the long end of the yield curve, plan sponsors will continue to feel this impact. What compounds the problem at these low rates is the fact that any small downward movement in long interest rates has a relatively large impact on the underlying liabilities.”

The numbers
  • At the end of 2012, assets for the Top 100 pension funds totalled $877.1 billion compared with 2011’s total of $798.8 billion. That’s an increase of 9.8%.
  • Ninety-nine plans reported an increase in pension assets. Resolute Forest Products (No. 45) was the only plan that reported a decline in assets, which fell 9.4%.
  • Thirty-nine plans reported double-digit increases in 2012 versus 17 in 2011.
  • Syncrude Canada (No. 84) had the largest percentage increase in assets, rising 20.9%.
  • General Motors (No. 19) has returned to the Top 100, and there is one other new plan, York University (No. 99).

The data was collected through the Canadian Institutional Investment Network, which surveyed 446 plan sponsors between Feb. 1 to May 17, 2013, with an accounting year-end date of Dec. 31, 2012.

Inflation could be another long-term challenge for plans with indexation as a feature. While low interest rates have helped keep inflation down, that could change if the global economy picks up speed. If plans are not well prepared for higher inflation, da Silva says that could potentially lead to a decline in their funded ratio.

The New Normal
Another issue is longevity and that will have an impact on pension plans. “We’re also faced with the fact that our constituents are getting older and that they’re living longer,” Hatanaka acknowledges. “That’s a happy situation from a real-world perspective but challenging from a pension perspective.”

The 2009 Canada Pension Plan Mortality Study notes that the life expectancy of men at age 65 was 15.2 years in 1985. By 2025, that should increase to 20 years. Women will live longer as well. Their life expectancy at age 65 was 19.3 years in 1985 and will increase to 22.2 years by 2025.

Declining memberships are also an issue for plans, such as OPTrust. Its ratio of contributing members to retirees has been going down over time and continues to do so. There are currently 1.2 active members for each retiree, and the plan is trying to focus on figuring out how to expand its membership.

Other plans, such as Resolute Forest Products (No. 45), are trying to keep the plan going after experiencing a restructuring (see “Back from the brink” below). Unlike OPTrust, Resolute has more retirees than active members, outnumbering them by more than three to one.

Despite the NSHEPP’s age (it was established in 1961), the plan is immature compared to other plans and has a relatively small proportion of its liabilities related to inactive members. But Jordan projects that will change dramatically over the next 10 years, with this making its management of contribution risk even more important.

Reducing Risk
Despite all the challenges plan sponsors face on the horizon, there are still some precautions they can take to help make pension plans more resistant to volatile markets. As equities recover, sponsors should really be thinking about changing their asset mix to reduce risk, Monteiro advises. He adds that as the plan gets closer to being fully funded, the rationale for continuing to take risk is lower and lower.

“I think what many companies should be doing now is look closely at their asset mix and decide whether they need to make changes now to reduce their risk exposure. I think the general sentiment is out there, but there’s not enough decisiveness to make sure that it actually happens,” says Monteiro. “As good as things have been so far, we’ve seen in the past that it can reverse very quickly.”

Back from the brink

When most companies file for court protection under the Companies’ Creditors Arrangement Act, freezing the DB pension plan or making cuts to it are often made. However, Montreal-based Resolute Forest Products (No. 45 on the Top 100 Pension Plan list), formerly AbitibiBowater, decided to keep the plan going.

“We have many retirees at Resolute, and our creditors—who are now shareholders—decided not to compromise the deficit like several other pulp and paper companies, effectively terminating their plans and cutting benefits in some cases by up to 40%,” explains Benoit Brière, the company’s director of pension and benefits.

Despite saving the plan, Resolute still faces hurdles. It had a deficit of about $1.9 billion last year and recently reached an agreement with the provincial government and Quebec’s pension regulator to make incremental contributions to the plan.

Resolute’s plan was also the only one on the Top 100 Pension Plan list to experience a decline in assets. Part of that was due to the number of pension payouts the plan had to make, but it was also a result of the sale of a sawmill and land in Nova Scotia. The buyer, which happened to be the province, acquired the assets, and Resolute covered the pension liabilities.

Being in the North American pulp and paper industry has been challenging. The U.S. housing market crash pushed down the demand for lumber, and newsprint sales have been hurt by the shift from print to digital publications.

The plan is also very mature, and the number of inactive employees for each active employee is 3.3 to 1. That means, the asset mix, which is currently 65% fixed income and 35% equities, needs to be more conservative than typical Canadian plans.

Brière says the plan is currently focused on stabilization and is not in a position to have a bad year if it shifts a large portion of its assets to equities. “We review and assess our investment policy on at least an annual basis, with updates during the intervening period as necessary,” he adds.

Craig Sebastiano is associate editor,

Get a PDF of this article for the list of the Top 100 funds.