Total DB plan assets tracked by PAIC have grown steadily in recent years — with substantial changes to their asset mix.

By Ed McCarthy

Canadian defined benefit pension plans’ assets surpassed the C$2.2 trillion mark as of year-end 2019, according to the Pension Investment Association of Canada’s (PAIC) 2019 Asset Mix Report. Alternative investments  accounted for the largest share of assets with 39.5% of the total, followed by equities (32.2%) and fixed income (31.8%). Cash positions were minimal at 0.25% of assets.

Among the alternatives, private equity, real estate equity and infrastructure equity were the category leaders, accounting for about 80% of alternative holdings.

In equity investments, global all-cap comprised roughly half the category, followed by much smaller allocations to emerging market equity and Canadian all-cap.

Canadian universe bonds, long-term bonds and global bonds were three largest fixed income holdings, respectively.

Steady Growth, Shifting Allocations

Total DB plan assets reported by PAIC have shown steady growth in recent years and substantial changes in their asset mix:

  • Total assets grew from C$1.58 trillion in 2015 to C$2.27 trillion in 2019, an increase of 43.3% for the five-year period.
  • Total asset growth from 2018 to 2019 was 8.3%.
  • In 2015, equities accounted for 37.9% of assets, followed by alternatives, 32.1%, and fixed income, 30.5%; as of 2019, equities dropped to 32.2%, while alternatives increased to 39.5%; fixed income remained relatively stable.
  • PAIC’s public reporting categories have changed over the past five years, but based on the available figures, the private equity allocation grew from 9.58% to 12.45%; infrastructure equity investments increased from 5.6% to 7.7%.
  • Allocations to several equity categories also changed significantly from 2015 to 2019 with a shift away from Canada and the U.S. toward increased global exposure; holdings of Canadian equities dropped from 8.7% to 3.8%; U.S. exposure fell from 4.8% to 1.7%; and the global equities category grew from 16.6% to 21.2% (percentages rounded).

PAIC does not discuss its surveys with the news media, but a recent report from Fitch Ratings reviewed the potential implications of these trends.

The report noted that Canadian pension plans “generally increased their exposure to private assets in recent years,” which Fitch Ratings defined to include private credit, private equity, real estate and infrastructure investments. These investments’ illiquidity can produce higher returns. But, as the Fitch report points out, “they can also yield more concentrated exposures to individual companies or sub-sectors if not carefully managed.”

Outlook

PAIC’s 2019 numbers reflect pre-coronavirus portfolios, and it’s likely the volatility that energy and investment markets experienced in 2020 has affected plans’ total assets and asset mixes in the interim.

Fitch Ratings highlighted the difficulty in forecasting the impact of the virus on DB plan portfolios: “Most large Canadian pension plans do not have outsized exposures to energy (excluding renewables).”

The group explained, “However, there could be knock-on effects to Canadian equities and bonds from a downturn in the energy sector given its contribution to the economy.”

Most portfolios have diversified real estate exposures that “vary across property types, including residential, office and industrial,” it said, which can provide diversification and income.

But, the report notes, pensions with larger allocations to retail properties and hotels could see more of a negative impact from the virus-induced slowdown.

The Canada Pension Plan Investment Board’s (CPPIB) portfolio holdings reflect PAIC’s findings.

According to its 2020 Corporate Overview, as of March 31, 2020, CPPIB held 24.7% of its assets in private equities, 11.3% in real estate and 8.6% in infrastructure investments.

In a recent interview with the Financial Times, CPPIB chief executive Mark Machin said that although he has expected lower overall returns for some time, the fund is “not rushing to make big changes to its allocations in response to the [coronavirus] crisis.”

Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.