The retiring executive explains the approach he’s taken to risk during his career with the Healthcare of Ontario Pension Plan.
By Rick Baert
Jim Keohane’s career at the Healthcare of Ontario Pension Plan has revolved around risk — the good and the bad.
“Managing our pension plan has been a combination of risk control and risk taking,” said Keohane, calling HOOPP’s investments “a dual structure portfolio” of liability hedging and return seeking assets.
Keohane should know. As president and chief executive officer of the C$94.1 billion defined benefit plan, he has been a pioneer in the use of liability-driven investing strategy, not as a means to an end of the pension plan but as a way to sustain the plan indefinitely.
As the executive prepared to retire in late March, he took the time to reflect on his HOOPP career of 21 years, including the last eight he spent as president and CEO. And that career, Keohane said, revolves around risk.
“There’s been a profound difference in how we do things” vs. other pension funds, Keohane said. “We view ourselves as a pension fund delivery organization. That’s always front of mind to us, to deliver outcomes regardless of the economic background.”
This approach has meant handling three kinds of risk that can “take things off the rails,” Keohane said: market risk, long-term interest rate risk and inflation risk.
“Each of those can be catastrophic unless you deal with them,” he explained. “Although we look at other risks, like foreign exchange and currency risk, those can be quite small by comparison with those three risks.”
Led by Keohane, HOOPP’s liability hedging strategy offsets interest rate and inflation risk affecting the plan’s liabilities with a portfolio constructed around bonds and real estate. “Those risks change over time,” he said. “Our interest rate exposure is not as much as before, but we would add to it rates go up. It’s not a static thing.”
However, along with using bonds and real estate as risk-mitigating strategies, HOOPP set itself apart from many pension plans by incorporating derivatives both in its liability heading and return seeking portfolios through the use of positions including swaps, futures contracts and options.
HOOPP’s derivatives position had a total notional value of C$269 billion as of Dec. 31, 2019, with assets of C$9.6 billion, according to its annual report. Derivatives delivered net investment income of C$6.45 billion in Those investment decisions made during the course of Keohane’s tenure at HOOPP have led to what he said was his best overall accomplishment as president and CEO — “the focus on the long-term view of things, to understand we’re delivering pensions and to deliver on that outcome We’ve made some big calls on where we want to be.”
Those calls were made in 2005-2007, when HOOPP moved to its LDI strategy — which served HOOPP particularly well during the financial crisis a decade ago. In 2008, according to a 2017 World Bank report, HOOPP’s investments lost 12% while other large pension funds sustained losses ranging from 15% to 25%.
“We had to understand the process we wanted to go to,” Keohane said, “so in 2008 it didn’t hurt us as much as others. Our investments served us well.”
In 2019, HOOPP returned 17.14% for the year and an annualized 11.38% over 10 years, vs. corresponding benchmarks of 15.06% and 8.85%, respectively; it had a funded status of 128%.
Keohane takes pride in the fact that turnover of top investment personnel at HOOPP has been low during his tenure.
“That’s not an issue here,” he said. “It’s collaborative here, no question. You need feedback to know where the opportunities are. Working with managers in different areas is critically important.”
The executive added, “There’s a bit of top-down management here, but really the only involvement I have is in overall asset allocation calls. We don’t change things very often. When we do make changes, we use a risk-based view of things.”
While investment staff has been a boon to HOOPP, one of Keohane’s biggest challenges early on was to get the pension fund’s board to see the value of an LDI strategy, particularly one with derivative use.
“We wanted to do things a lot of others might not, or would entrust to their hedge funds or their custodians,” Keohane said. “Getting our board members on board and to have the proper people in place to reduce risk, that’s often hard to understand. (Board members) saw leverage as risk. The shift happened in an evolutionary way over a five- to 10-year period, with each step built on the previous one.”
Keohane advised pension funds looking to do a similar transition to LDI that the shift doesn’t happen overnight. “If someone wants to do what we did with a traditional portfolio, it takes a lot of work and understanding to do.”
Rick Baert is a freelance journalist who specializes in covering institutional money management, trading and asset servicing. He is a retired editor and reporter with 42 years of experience with financial, business and daily news services. Rick has covered the Canadian pension fund industry for the past six years.