Top 100 pension funds report: Northward bound

Take the Ontario Teachers’ Pension Plan (Teachers’); it took the No. 1 spot in the Top 100 Pension Funds with a return of 13%, beating its benchmark by 4.2%—an increase of 9.9% over last year’s reported numbers. According to Jim Leech, the fund’s president and CEO, “That’s an exceptionally strong year, one of the strongest in our history. We went into the year playing defence, but we were well positioned to take advantage of a return to traditional valuation.”

The Ontario Municipal Employees Retirement System (OMERS) (No. 2) and the Healthcare of Ontario Pension Plan (HOOPP) (No. 4) also beat their benchmarks, each reporting increases of 10.6% and 15.2%, respectively, over last year’s reported numbers. That is a 10% increase over last year’s numbers for OMERS and 16.1% for HOOPP.

“The biggest determining factor was that we were positioned defensively going into the market downturn,” says president and CEO of HOOPP, John Crocker. “As a result, we were able to take advantage of the opportunities that presented themselves.”

Jim Keohane, chief investment officer of HOOPP, adds that the plan’s positive returns were specifically due to the fund shifting out of Canada bonds into provincial bonds and being overweight in equities and credit at the bottom of the market.

Michael Nobrega, CEO of OMERS, says the plan increased its returns through infrastructure, public equities and private equity, adding, “We were substantially overweight in the beginning part of the year in fixed income. We remained so throughout the year because we felt there is significant deleveraging to go on, and we wanted to keep open to opportunities. As we’ve seen in the Greece situation, on a global level, there is still a long way to go.”

But it’s not just the giant funds that are boasting gains; 66 of the Top 100 all enjoyed double-digit increases over last year. Only eight pension funds reported negative returns.

The Numbers

• At the end of 2009, assets for the Top 100 pension funds totalled $661 billion. Last year’s total was $598.6 billion. That’s a 10.4% increase.
• Last year, we saw 94 of the Top 100 report losses; this year, only eight pension funds reported a loss.
• Sixty-six pension plans reported double-digit increases in the 2009 report.
• There are five new funds on this year’s list: Cominco Pension Fund Co-ordinating Society (Teck Cominco Metals Ltd.) (No. 81), Pratt & Whitney (No. 86), Kraft Canada Inc. (No. 90), Manitoba Telecom Services Inc. (No. 94) and Domtar Inc. (No. 99).
• General Motors (No. 16) had the largest increase, 70.1%, moving up from the No. 21 spot last year.
• Saskatchewan Teachers’ Retirement Plan (No. 66) and Sears Canada (No. 95) had the smallest change, decreasing 0.1%.

Taking in the landscape
While this is mostly positive news, plan sponsors need to be aware this is merely a clearing in the forest; there is still some thick brush ahead. It’s highly unlikely these results are the start of a year-over-year trend, so careful plan analysis is key. “Those plans that haven’t stepped back and looked at their asset mix or done any soul-searching on what they are doing, that should be a cautionary flag to them,” says Duane Green, senior vice-president with Franklin Templeton Investments. “Yes, staying invested is good, and yes, things will come back, but you don’t want to rely on broad market rallies to bring it all back into line. Plan sponsors should be really looking at where their plans are invested to ensure that they invest in the necessary asset classes that have appropriate levels of risk.”

According to the Financial Services Commission of Ontario, at the end of 2009, the median pension fund was 85% funded, which was significantly up from where funds were (77% funded) at the end of 2008. But despite the late market rally in 2009, plans are still a far cry from the peak in 2007 when plans were 93% funded.

“[Last year] was a good year. On the asset side, it did recover a lot of the 2008 losses; it was a godsend for pension plans,” says Stephen Donald, a consulting actuary with Buck Consultants. “But, it didn’t make up for all of the 2008 losses. At the end of 2009, the asset levels were about equal to what they were at the end of 2007. But the liability side kept growing.” Based on market expectations, some speculate it may take up to four years for plans to get back to those 2007 levels.

Lindley adds, “People were certainly better off at the end of 2009 than they were a year earlier, but we are still 20% below our peak. And even at the peak, some plans were already in some form of deficit. We’re not entirely out of the woods; we are just in a less dense patch than [where] we were.”

Blazing new trails
The financial markets are never easy to orienteer, but plan sponsors can better situate themselves if they update their maps as they trek through the markets. This recent economic journey has taught plan sponsors that they should know where they are invested and ensure that it’s a proper fit for their portfolios. “When you have a crisis, what you thought was liquid yesterday is not liquid today,” explains Leech. “It’s important that you position yourself so you never have to sell something you don’t need to sell. Liquidity is king in any financial crisis.”

HOOPP learned that lesson when the tech sector melted back in 2001/02. “That was a wake-up call to us as to how to structure things, and it started us on the asset liability driven journey that continues to this day,” says Crocker, adding that the organization took a few years to assess its asset liability structure and put thought into its systems. “We started to implement them in the fall of 2007 with a significant move from equities to fixed income, which paid off big time in the latter part of 2008.”

Greg Malone, a principal with Eckler Ltd., feels this crisis tested the risk management techniques plan sponsors had in place, which many found weren’t as stable as they thought. He adds that new ways to manage risk and use derivative strategies may emerge because of this downturn. And, now that the pension plans have moved out of crisis management mode, Malone says, “There has been a marked increase in the attention paid to pension funds, investment strategy and diligent, ongoing monitoring of all aspects of pension funds. I think this is going to be something that continues, especially if the ongoing market volatility is any indication of what’s in store.”

Many plan sponsors are asking, Is now the time to hold back and cautiously protect the gains we’ve made, or should we try to maximize opportunities by taking on more risk, which may help us come from behind at greater pace? Money managers and consultants alike have noticed that plans are split between these two camps.

“The markets have been volatile,” says Scott Clausen, partner and professional leader for the retirement risk and finance business with Mercer. “With the combination of the market volatility, the spread between corporate and government bonds bouncing around and all the discussion about possible pension reform, there is a lot of uncertainty in the pension environment.”

However, Clausen’s colleague, Jaqui Parchment, partner and director of consulting for Mercer’s investment consulting business, knows one thing that is certain. “Risk is real,” she says. “That may sound kind of trite. But, for many plans, in the past, there was a sense that risk was a concept or theory. [Now], having really lived the pain, sponsors can more clearly assess their true risk tolerance.”

The economy has been on a tumultuous journey since the end of 2007, and with no certain economic growth on the horizon—despite last year’s rally—plan sponsors need to mind any challenges that lie ahead.

Get a PDF version of this article