The Fall Of Canada’s Pension Funds

The Investment Management Corporation of Ontario (IMCO) recorded an average loss of 8.1% on its assets in 2022, as the pension fund investor’s exposure to falling values in the public stock and bond markets slashed its annual returns.

Returns ranged from a loss of 9.1% to a gain of 1.6% among IMCO’s clients, which included the Workplace Safety and Insurance Board and the Ontario Pension Board, for a weighted average loss of 8.1% for the year.

IMCO’s assets under management also declined to $73.3 billion as of December 31, down from $79 billion the previous year.

With inflation at its highest in decades, a combination of heavy losses on a wide range of public equities and fixed-income investments – which suffered a rare simultaneous decrease last year – devastated earnings for many pension plans’ main portfolios. This resulted in “a challenging year to say the least,” according to IMCO CEO Bert Clark.

IMCO, which invests on behalf of a number of public-sector pension plans in Ontario, was more vulnerable to public-market drops than many of its large pension-plan peers in Canada. IMCO invests in publicly traded assets for more than two-thirds of its portfolio, with a lesser allocation to private assets such as infrastructure, real estate, and private equity.

“Unfortunately when you have a mostly public portfolio, broad public market conditions are kind of like gravity: You can’t really escape it,” Clark said in an interview. “We’re disappointed by minus 8 [per cent returns] but we weren’t entirely surprised.”

The 8.1% loss nevertheless outperformed IMCO’s internal benchmark return of minus 8.4%. Over three years, the yearly return on its investments is 2%, above the benchmark of 1.6%.

Over time, IMCO hopes to outperform its annualized benchmark by 0.25 to 0.5 percentage points, “so we’re right on target,” Clark said. “But there are things that are frankly working better than others.”

Pension funds across Canada take losses

IMCO’s loss is one of the latest drops in Canadian pension funds. Last week, Alberta Investment Management Corp. (AIMCo) reported a loss of 3.4% for 2022, blaming the fall in both public equities and fixed-income markets.

The fund reported a loss last year as a result of a combined 8.1% loss in its money market and fixed-income investments, as well as a 10% loss in its public equities investments. AIMCo’s total client assets under management were $158 billion at the end of 2022.

In February, the Caisse de dépôt et placement du Québec, Quebec’s public pension fund manager, reported a 5.6 percent loss in 2022. President and CEO Charles Emond emphasized that the first half of the year saw the worst simultaneous correction of the stock and bond markets in 50 years.

“Facing this abnormal context, all our asset categories succeeded in surpassing their indexes, even though there were very few places to hide for investors,” Emond said.

Bonds have traditionally provided some protection against stock market declines in a diversified portfolio, but the magnitude of interest rate hikes sent the bond market down last year.

According to the Caisse, the 5.6% loss is less than the 8.3% decrease in its benchmark portfolio. Net assets declined by $18 billion to $402 billion as of Dec. 31.

Meanwhile, the Healthcare of Ontario Pension Plan (HOOPP) suffered its first loss in 14 years in 2022, in a report released this March. It lost 8.6% on its investment portfolio, reducing its assets to $103.7 billion at the end of the year.

HOOPP’s fixed-income, or bond, portfolio dropped 17.8% in 2022, while public stocks lost 12.49%.

In an interview, HOOPP’s chief investment officer Michael Wissell described the annual loss as “disappointing” – but unsurprising for a pension plan with its asset mix.

“We have, broadly, a more decent allocation to public stocks and bonds. And when you look at 2022, the area that did the most poorly was public stocks and bonds. So in the near term, that’s given us our first negative return since 2008,” Wissell said.

According to its investing strategies, HOOPP aims to have around 40% of its portfolio in bonds and 25% in public shares.

Wissell stated that despite the overall loss, HOOPP outperformed its benchmark – what a similar portfolio should have returned – by 4.61 percentage points. And, he added, “across the board,” each investment department outperformed its benchmark.

“What we say here is, we’re in the pension delivery business. We’re not in the money-management business, so against that backdrop, we’re pleased that we remain fully funded,” Wissell said.

Information for this briefing was found via The Globe And Mail, Yahoo Finance, and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.

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