Pensions Balance Risk and Return

Terry Flanagan

US Pensions may reach for higher returns to reach funded status, but thereby, accept more risk, said Canadian pension.

For the Healthcare of Ontario Pension Plan, better known as HOOPP, funding status is everything.

“Our liability driven investing approach has helped HOOPP stay the course during periods of market volatility,” said chief executive John Crocker. “We were one of the few plans globally to come through the two-year period of 2008 and 2009 in a positively funded position, and HOOPP was fully funded as of the end of 2010.”

HOOPP’s success is a vastly different picture from the pensions south of the border, in the U.S. The U.S. pension struggle to attain or retain funding levels are an age-old problem, but aspiring to reach funded status by dabbling in possibly higher-yielding and riskier opportunities , may not be the right course of action, according to Crocker.

“If you are underfunded, the natural urge is to try and boost returns to get caught up – but in doing that, you’re increasing risk. I think each plan needs to review its investment strategy, and ensure that the strategy relates to their long-term funding commitment,” he told Markets Media.

Crocker has steered his ship toward liability driven investing over reaching for starry returns.

“While 2011 has been a very volatile year, we are confident that the liability driven investment strategy we are deploying will help ensure we remain stable,” he said, citing that “the majority of our assets are in fixed income investments,”

“Our exposure to equities is very carefully controlled,” he also noted, providing confidence that such austerity measures will “keep us in a good position by year end. “

Crocker knows to stay the course with strategies embedded in their mandate, and save cash for interesting investments that may lie ahead. “Our secret is staying with our strategy – and as a result we have the cash to take advantage of buying opportunities when they present themselves.”

Timely transfers of equity investments into cash have aided HOOPP greatly during the financial crisis. Peer plan sponsor, Ontario Teachers Pension Plan lost $19-billion when markets crashed in 2008 whereas example HOOPP lost much less that year thanks to a well-positioned reduction of because of its equity holdings in 2007, according to news source The Globe and Mail. That year, the firm had decided it needed a long-term boost of cash flow to pay benefits.

Moreover, being prudent about risk management and covering liabilities extends far beyond Crocker and the investment team—it’s the basis of HOOPP’s corporate culture.

“I’ve often said that the key to HOOPP’s success has been the fact that our investment target is our funding target. From Board committees that focus on this topic, to the investment team, and on to the rest of us at HOOPP, ensuring the plan is favorably funded and can continue to deliver pension payments is encoded in our DNA.”

The firm’s participants are at front and center of its investment mandate. “If you ask anyone at HOOPP what’s most important, it’s continuing to ensure that HOOPP members will get their pensions, and can enjoy a comfortable retirement that allows them to live with independence and dignity.”

The numbers prove HOOPP’s success. The HOOPP plan, which serves over 250,000 people in Ontario’s health care sector, earned almost a 14 percent return on its investments last year, boosting its assets to $35.7 billion from $31.1 billion in 2009.

Crocker is especially thankful for the long-term investing horizon inherent to pension plans citing that “time is an ally, not a threat.”

“Every pension fund needs to take a long-term view, rather than making short-term corrections and adjustments – a pension plan member can contribute for 30 years and then retire for 30 years,” Crocker said. The transition from reaching for returns to liability driven investing is “not an easy transition, but once it’s made, you are making your pension fund more solid, and better able to withstand periods of volatility.”

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