Ongoing pandemic challenges and market volatility, but also opportunities for success
By Ed McCarthy
The past year presented multiple challenges for pension plans including dealing with COVID-19 and interest rate and equity market volatility. CAiP Forum asked several industry participants to share their perspective on the past year.
CAiP Forum: What have been the primary challenges that you believe Canadian pension plans encountered in 2021?
Alistair Almeida
Alistair Almeida
Segment Lead, Asset Owners
CIBC Mellon
In the wake of COVID-19, pension-related regulatory and public policy developments relevant to large Canadian public pension funds and other institutional investors will unfold – likely over years. In particular focus are changes that allow for the growth of existing public pension organizations, across multiple organizations, between provincial borders and beyond.
This has included rules to facilitate the merger or consolidation of plans as well as opportunities for public pension organizations to provide services, such as third-party asset management, to others beyond the plan’s existing membership.
Twenty-six percent of funds in our study cited consolidation as one of the most important trends ahead. For others, the growth by consolidation and merger is an opportunity to build necessary scale to retain or gain competitive advantage and cost efficiency.
Many pension funds are also reviewing their approach to investment strategy and investment operation models. COVID-19 has emphasized the importance of keeping a diverse portfolio, including a desire by pension plans to seek yields in alternative asset classes while keeping an eye on the vulnerabilities of illiquid assets such as infrastructure.
Maxime Aucoin
Maxime Aucoin
Executive Vice-President and Head of Total Portfolio
CDPQ
Of course, COVID was a primary concern for all – not only as an investment challenge but as an organizational one too. From an investment perspective, it created “winners and losers” amidst significant market movements and created a need to challenge our strategy to determine what the real long-term trends are and what is only temporary (for example: inflation, digitalization, etc.).
ESG considerations are certainly not new, but they rose at the top of the agenda of most institutional investors, particularly when it comes to climate change and energy transition.
Integrating ESG considerations has been part of CDPQ’s DNA for a long time and in 2021, we reaffirmed our commitments with increased ambition. More broadly, ESG is forcing many institutions to revisit the way they approach stakeholder relations.
David Ross
David Ross
Managing Director, Capital Markets Group
OPTrust
Canadian pension plans faced a number of challenges in 2021. While the broad equity and risky asset market has provided a supportive tailwind this year, there were a number of deleveraging episodes to contend with in 2021. There was also an increase in retail and speculative participation in markets this year, sometimes through ‘meme investing,’ which was a new source of volatility at times.
Despite the positive progress on vaccines, the pandemic continued to have rolling impacts on activity, particularly as the Delta variant locked down Asia mid-year.
Further, China’s markets, an increasingly important part of global investment portfolios, struggled with regulatory crack downs and corporate creditworthiness concerns. Inflation also found its way to center stage as the significant monetary and fiscal policy stimulus in the West, coupled with COVID-19 and climate-related supply disruptions, resulted in higher and more persistent inflation than many, including central bankers, had expected.
While these challenges kept us on our toes over the past year, they also served as a near-constant reminder of how important our work is to our members in knowing they can continue to count on a secure, predictable retirement income.
Gosia Talanczuk
Gosia Talanczuk
VP Investment Policy and Oversight
LAPP Corporation
After the volatile 2020, 2021 was a year of much improved investment returns for most institutional funds. LAPP ($58 bln AUM) has also gained from equity markets rallying on hopes for a lasting economic recovery and from actively managed strategies implemented by the Plan’s investment manager, Alberta Investment Management Corporation (AIMCo). LAPP Corporation’s investment policy agenda of 2021 was focused on projects improving the overall risk profile of our Plan going forward: finalizing an ALM study, updating the Plan’s asset mix and updating risk volatility expectations in our SIPP, as well as addressing climate risk in our updated Responsible Investing policy.
The challenges we have encountered this year were mostly perennial and had a lot to do with inherent complexities involved in managing the large multiemployer DB Plan serving over 280,000 members and more than 420 employers.
One of the ongoing challenges is the Plan’s governance demanding to manage the Plan’s investments and pension services within the complex multi-client structures of two large crown corporations (AIMCo and Alberta Pension Services–APS) that allows for the realization of economies of scale by the two organizations but also requires addressing potentially diverse policy choices by their participating clients.
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
