A Happy New Year for Canadian Pensions | Chief Investment Officer

(January 3, 2014) — Canadian defined benefit pension plans averaged a funding ratio of 93.4% at the end of last year, marking an increase of 24.8 percentage points over the past 12 months.

Approximately 26% of the surveyed plans were more than fully funded at the end of the fourth quarter, compared with 15% in the previous quarter and 3% at the end of 2012.

Will da Silva, senior partner at Aon Hewitt, said the tremendous improvement in the financial health of pension plans should trigger plan sponsors to revisit their funding and investment strategies as they may be closer to their ultimate de-risking objectives than they previously thought.

“Many sponsors will start considering such end-game options as full immunisation of plan assets to plan liabilities, partial settlement of retiree liabilities, or a full plan wind-up,” he continued.

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“At the very least, sponsors should be analysing the plan’s risk profiles to ensure they truly understand how the change in capital markets in the last 12 months affected their plans, and put strategies in place to limit their exposure should capital markets become unfavourable to the plan again.”

The main causes of this increased solvency position were the improved equity market returns, higher long-term interest rates—which rose by 91 basis points over the year—and sponsor contributions toward solvency funding requirements.

The data was echoed by rival consultants Mercer, which has also released its latest round of research on Canadian funds at the turn of 2014.

Its pension “health” index reached its highest level in 12 years at the end of December. The index, which tracks the funded status of a hypothetical defined benefit pension plan, stood at 106% on December 31, up from 82% at the start of the year and at its highest level since June 2001.

Almost 40% of pension plans tracked by Mercer are now fully funded, compared to 6% at the beginning of last year. In addition, just 6% are now less than 80% funded, down sharply from 60% at the beginning of the year.

But Canadian plan sponsors must do more to tackle the risk profiles of their portfolios before they crack open the champagne. In November, Aon Hewitt warned that too many Canadian plan sponsors still had a long way to go in terms of de-risking their pension plans.

Research from November 2013 found only 33% of Canadian plans reduced their equity holdings in the past year, with another 30% planning to continue the trend to divest from equities in the year ahead, causing alarm bells to ring for da Silva.

“Successful plan management can no longer be considered a passive exercise,” he said at the time. “It requires careful attention to long-term funding and investment strategy and a disciplined focus on adapting the strategy to take advantage of opportunities that may arise.”

So severe are the concerns around pension funds’ solvency in Canada that 46% of funds took advantage of funding relief measures offered by the government—which allow for the elimination of debt payments relating to solvency deficiencies, extension of the solvency debt payment period up to a maximum of 10 years, and the use of a smoothed asset value for solvency valuations. Another 30% planned to use the relief in 2014 too.

(January 2, 2014) — Bill de Blasio, the newly inaugurated mayor of New York City, is moving forward with his plan to allocate $1 billion of pension assets to affordable housing—a massive increase to the funds’ prior investments to this space.

His plan calls for creating 11,000 units over eight years with the additional $1 billion input from the city’s $144 billion pension funds. It also includes contraction of 50,000 new units through “inclusionary zoning”—a requirement that developers build affordable homes for low- and middle-income families.

De Blasio campaigned heavily on closing the gap between the wealthy and the poor—ending the so-called “Tale of Two Cities”—and won the November election by a landslide. He is New York City’s first Democratic mayor in 20 years.

“We see what binds all New Yorkers together: an understanding that big dreams are not a luxury reserved for the privileged few, but the animating force behind every community, in every borough,” de Blasio said in his inaugural speech.

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The new mayor reiterated his agenda for affordable housing “so that New Yorkers see our city not as the exclusive domain of the One Percent, but a place where everyday people can afford to live, work, and raise a family.”

Under former Mayor Michael Bloomberg’s “New Housing Marketplace Plan,” New York was able to finance almost 160,000 affordable homes since 2003, according to the city’s Department of Housing Preservation and Development.

However, the idea to invest pension capital into housing projects isn’t new.

New York City’s five pension funds have been investing in affordable housing under the Economically Targeted Investment (ETI) program since 1981, according to the Office of the New York City Comptroller, allocating 2% of assets.

The office also explained that “the ETI program’s historical investments have been targeted towards affordable or workforce housing in low-to moderate-to middle-income neighborhoods and populations in the five boroughs of NYC,” having invested close to $2 billion in the last 30 years.

De Blasio remained confident in the ETI program’s success: “Those investments have earned a solid return, put New Yorkers to work, and helped refurbish thousands of affordable homes across the city.”

According to the Office of the Comptroller, the ETI program’s investment portfolio has consistently outperformed its benchmark since its inception. As of June 30, 2012, its one-year return was 7.09% compared to the benchmark of 6.41%. The five-year return was 7.31%, higher than its 6.47% benchmark return, and the 10-year return was 6.31%, also better than the benchmark return of 5.48%.

New York City’s pensions currently partake in three different ETI investments: the Access Capital Strategies Separate Account, the AFL-CIO Housing Investment Trust, and the Public Private Apartment Rehabilitation Program.

The de Blasio campaign revealed that it calculated potential annual units preserved through pension fund investments by “dividing the total annual funding the city expects to secure from pension funds by the average cost per affordable unit created by ETIs directed to Community Preservation Corporation Revolving Credit Agreement in 2003-2011.”

To implement the allocation, the mayor needs the support of five pension plans’ boards of trustees as well as Scott Stringer, the newly elected comptroller.

A trustee of the New York City Employees’ Retirement System and former Manhattan Borough President, Stringer had pushed for comprehensive pension risk assessments and an overhaul of the New York City Housing Authority.

“I believe that pursuing a progressive agenda and being fiscally responsible is not mutually exclusive. We can and we must do both,” Stringer said in his inaugural speech yesterday.

He also emphasized city’s need for cheaper homes: “We can shelter every family in safe, affordable homes, not squalid shelters where 22,000 of our children will go to sleep tonight. As the City’s chief fiscal officer, it is my duty—my promise—that I will do everything in my power to maintain our fiscal health.”