US Public DB Plans Boost Funded Level to 73.1% in Q4

The funded status of the 100 largest public defined benefit pension plans in the US improved by $60 billion in the fourth quarter of 2017, bringing their funded level up to 73.1% from 71.6% at the end of the previous quarter, according to the consulting firm Milliman.

In aggregate, the plans had investment returns of 3.24% during the quarter, as estimated returns ranged from a low of 1.55% to a high of 4.32%. This brought their total asset value to $3.615 trillion at the end of the fourth quarter, from $3.517 trillion at the end of the third quarter.

The plans generated investment income of approximately $126 billion, but the plans collectively paid out approximately $28 billion more in benefits than they took in through contributions from employers and plan members, according to Milliman. At the same time, the aggregate deficit of the plans fell to $1.332 trillion at the end of the year, from $1.392 trillion at the end of September.

“While a lot of media attention has been paid to the recent market volatility in early February, it’s not a reason to panic when it comes to public pensions,” said Becky Sielman, author of the Milliman 100 Public Pension Funding Index (PPFI). “Equity gains and losses are typically smoothed out over a number of years when calculating pension funding, making short-term market volatility less of a concern on funding than interest rate assumptions—which carry greater long-term implications for these pensions.”

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The total pension liability of the PPFI increased to an estimated $4.947 trillion at the end of the year from $4.908 trillion at the end of the third quarter. Meanwhile, funded ratios improved broadly, with five more plans surpassing the 90% funded mark by the end of the fourth quarter. There are now 21 plans out of the 100 with funded levels above 90%, compared to 16 at the end of the previous quarter, and just 10 at the end of 2016.

However, among the more poorly funded pension plans, there has been less improvement, said Milliman, as 24 plans have funded levels below 60%, and 10 plans have funded levels below 40%. This is relatively unchanged from the end of 2016, when there were 25 plans with funded ratios lower than 60%, and 11 below 40%.

Tags: Defined benefit (db) pension plans, Milliman, Pension, Public Pension Funding Index

Caisse de dépôt et placement du Québec, (CDPQ) Canada’s second-largest pension fund manager, reported a 9.3% return for 2017, and an annualized return of 10.2% over the past five years.

CDPQ said its 2017 return reflected strong equity market performance, but did not fully capture the surge in multiples for tech companies and companies with an accelerated growth profile.

CDPQ’s eight main clients received returns between 8.0% and 10.9% for the year ended Dec. 31, 2017, and between 8.7% and 11.5% over the past five years. Net investment results for the year were C$24.6 billion, and net deposits totaled C$3.2 billion.

Total net assets were C$298.5 billion, increasing by C$122.3 billion over five years, with net investment results of C$109.7 billion and C$12.6 billion in net deposits from its clients.

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“Over a five-year period, we achieved our objective: a solid return that exceeds both our benchmark and the long-term needs of our clients,” said Michael Sabia, CEO of CDPQ, in a release. “With C$6.7 billion in new investments and commitments, we’ve had an exceptional year in Québec.”

CDPQ said that compared to its benchmark portfolio, its performance represented C$12.2 billion of added value for its clients over the last five years. The firm said it focuses on equities that provide stable and predictable returns in order to reduce sensitivity to market fluctuations, such as the volatility that hit the global markets in early February.

“We are facing an unusual environment,” said Sabia. “This volatility could have materialized at any time in recent months. So we continue building a more resilient portfolio that can withstand market transitions of this kind.”

The fund manager has significantly diversified its geographic exposure over the last five years, expanding its global investments by C$105 billion to more than C$190 billion. It also more than doubled its exposure in growth markets, which rose to more than C$35 billion at the end of 2017 from C$15 billion in 2012.

CDPQ said it repositioned its fixed-income assets in 2017 during a period when interest rates remained low, and bond returns were expected to be modest. It looks to diversify its activities by reducing its exposure to the traditional bond market, and increasing its credit activities in higher-performing market segments, including corporate credit, sovereign credit, and specialty finance.

The firm also reported more than C$7.6 billion in private equity transactions completed internationally. Some high-profile transactions include the acquisition of GE Water, a waste water management company, in partnership with SUEZ. CDPQ also invested in Sabia, a company that provides medical diagnosis technology, and Fives, an engineering group.

CDPQ also acquired a stake in eight Mexican wind and solar farms operated by Enel Green Power, and invested over C$390 million in Québec wind energy producer Boralex. The firm has doubled its worldwide infrastructure holdings over the last five years to more than C$16.0 billion.

Tags: Caisse de dépôt et placement du Québec (CDPQ), Canada, Pension, Returns