When the S&P 500 closed at a record high on February 19, Canada’s major pension plans, with more than a quarter of their investments in stocks, were in a comfortable position in spite of the looming coronavirus pandemic.
Five weeks later, Canada’s 10 largest pension funds—upon which millions of Canadians are relying for retirement—have lost an estimated $104 billion, according to an analysis by The Logic.
But not all pensions are created equal, and while some—including the country’s largest, the Canada Pension Plan Investment Board (CPPIB)—have high exposure to public markets, others have managed to mostly skirt the crash that has seen the S&P 500 lose roughly US$8 trillion this year.
Canada’s 10 largest pension funds have an average of 27 per cent of their assets invested in the public markets, based on an analysis of each firm’s disclosed asset allocation when last reporting their finances. With a combined $1.7 trillion in assets, they have more than $500 billion invested in public equity markets.
It’s not just public equity that can impact the health of pensions. They are also vulnerable to swings in other asset classes, such as fixed income, private equity, real estate and infrastructure, areas that have also taken a hit in the crisis. Mortgage applications in the U.S. dropped 29.4 per cent last week and capital from seed-stage funding has decreased about 22 per cent globally since January. Currency fluctuations are also a risk, particularly the Canadian-to-U.S.-dollar exchange, which has dropped about 30 per cent since its 2011 high.
Canada’s 10 largest pension funds have lost an estimated $104 billion in public equity amid COVID-19-related market chaos, based on an analysis conducted by The Logic.
The funds have an average of 27 per cent of their assets invested in the public markets. Public equity declines are just one element of financial turmoil pensions are dealing with at the moment. The real estate market is bracing for a downturn and the Canadian dollar is dropping.
While all 10 funds are long-term investors with diversified portfolios, some are more susceptible to market swings than others.
British Columbia Investment Management Corporation (BCI), which manages funds for over 2.3 million people, is the most exposed to public equity, which represents 41 per cent of its $153.4 billion in assets. Asked to comment on The Logic’s estimate it has lost about $8.5 billion in public equities since it last reported, external communications manager Ben O’Hara-Byrne said the fund was looking for long-term returns.
“BCI had been anticipating and prepared for a market downturn by defensively positioning and diversifying our clients’ portfolios,” said O’Hara-Byrne.
CPPIB had $140.8 billion invested in public equity as of Dec. 31, 2019, or about 27 per cent of its portfolio. It declined to share how much it had in public equity after the market drop.
“The Fund is not immune to occasional, severe drops in the value of stocks. Indeed, of course, the current situation is impacting the Fund,” said Michel Leduc, global head of communications. “The Fund is demonstrating significant resilience relative to much sharper drops observed in public equity markets globally.”
The Caisse de dépôt et placement du Québec has the second-largest dollar amount invested in public equity: $116.9 billion, representing 34 per cent of its assets.
“The world and the markets are obviously facing challenging times,” said Maxime Chagnon, head of global media relations. “We are monitoring our portfolio and various asset classes very closely in this exceptional situation.”
Not all of the big 10 pension funds are so exposed to public equity. The Ontario Teachers’ Pension Plan’s public equity holdings comprised just 10 per cent of its assets, according to its most recent financial report. Asked for comment, Teachers’ said that its 2019 results will be reported next week.
“Teachers’ is a more mature plan when you compare it to their peers. Their population is older. Their pensioner-to-active ratio is shrinking. They’re very much looking to manage risk within a different tolerance,” said Andrew Whale, a principal at consulting firm Mercer Canada.
OPTrust, which manages a defined benefit plan for over 96,000 public-sector workers in Ontario, had the least exposure to public equity, at just six per cent.
“Many pension plans around the world tend to have an over-concentration to the equity risk factor. We are very focused on trying to deliver on our pension promise with the lowest risk possible,” James Davis, OPTrust’s chief investment officer, told The Logic, adding that its portfolio is fully funded.
The Alberta Investment Management Corporation’s (AIMCo) public equity holdings made up $41.5 billion when it last reported for the year ended March 31, 2019—36 per cent of the pension’s total holdings. AIMCo said it would report more recent numbers in mid-April.
“The recent volatility in investment markets and decline in economic activity as a result of the COVID-19 pandemic is truly unprecedented,” said Dénes Németh, AIMCo’s corporate communication director.
“This has created significant challenges for institutional investment, but adherence to prudent management of our clients’ portfolios, coupled with the long-term investment horizon of our clients and a broadly diversified portfolio both in terms of asset classes and geographies, will allow our clients to weather the market downturn, as we have on their behalf in the past.”
In recent years, Canada’s top pension plans have been widely heralded as global leaders for both their stability and rapid increase in assets. In 2017, the World Bank Group commissioned a report on Canadian pensions to help pension funds in emerging economies model their systems. In November 2019, five Canadian pension funds were ranked among the top 100 global asset managers.
“Canada’s major pensions really are world-class,” said Whale. “They’re set up to report for decades to come, and are set up to get through this kind of short-term volatility.”
“It’s a big loss for such a short period of time. The major pensions are being hammered from all sides right now. Public equities are dropping at the same time government bond yields are at an all time low,” said Whale.
The Logic calculated the percentage and dollar amount of Canada’s 10 largest pension plans’ public equity exposure, based on their most recent financial statements. Most of the pension funds do not provide a detailed breakdown of their equity investments. Of those that do, all list U.S. exposure. Using the S&P 500, an index composed of about 500 of the largest publicly traded firms in the U.S., The Logic calculated roughly how much each fund’s equity holdings had decreased since they last reported. For example, the S&P 500 decreased 24.24 per cent between Dec. 31, 2019 and March 24, 2020, the day the calculations were conducted. The Dow Jones Industrial Average, the Nasdaq Composite and the S&P/TSX Composite Index were also checked to ensure the S&P 500 was not an outlier. All the major indices declined by about the same amount over the same period.
Mercer Canada’s pension health index ended February at 103 per cent, which means pensions were slightly overfunded, with more money than obligations. That’s dropped to 88 per cent as of March 20.
That’s light years ahead of the U.S., whose largest fund, the California Public Employees’ Retirement System (CalPERS), has a funding ratio of 70.1 percent, according to the Center for Retirement Research. CalPERS reported last week that it had lost about US$67 billion in market value since January.
When a pension is underfunded, one of three things can happen: employers, workers or both can make more contributions; the pensions can cut benefits; or the fund can earn a higher return on its remaining investments.
For funds that aren’t over-leveraged in public equities, this is a time that can also create value.
“I think taking the opportunity to add modestly to our equity holdings now is the right thing to do,” said OPTrust’s Davis. “But we’re looking at it across all asset classes. And so, my private markets teams have a lot of dry powder, as well, and they’re in a position to be able to add as opportunities present themselves.”