Jim Keohane on 20 Years at HOOPP?

Jim Keohane, President & CEO of the Healthcare of Ontario Pension Plan (HOOPP), announced today that he will be retiring in March of 2020.

He will continue in his role for a full year while the Board of Trustees conducts an extensive search to find a successor, and will work closely with the Board to ensure a smooth transition.

Jim began his career at HOOPP in 1999 as Manager, Equity Trading. From there, he had progressively senior roles and became CEO in 2012. He is a pioneer in the area of Liability-Driven Investing, which he introduced and implemented at HOOPP; and he developed HOOPP’s derivatives capability, which is considered second to none in Canada. During Jim’s time as President & CEO, the Fund has doubled in size, growing to $79 billion in assets.

“Jim is well respected around the world for his pension advocacy, investment strategy and leadership,” said Adrian Foster, Chair, HOOPP Board of Trustees. “Under his leadership, he and his team have done an exemplary job of delivering on the pension promise. He has built a strong culture and business platform to help ensure the organization will continue to meet its critically important mandate of providing pension security to members.”

Dan Anderson, Vice Chair, HOOPP Board of Trustees added: “On behalf of the entire Board, I congratulate Jim on an outstanding career, thank him for his lasting and ongoing contribution, and wish him all the best for the next chapter of his life.”

“It is an honour to be a part of HOOPP and I am very proud of the many shared achievements during my time with the organization,” said Jim. “We have excelled during times of challenge and change and, most importantly, we have continually strengthened our ability to deliver on the pension promise to our members.”

He added: “I am grateful for the talent, dedication and support of HOOPP staff, the passion and commitment of our members, and the opportunity to represent and talk about HOOPP around the world. I will retire next year knowing that HOOPP is well positioned for the future and has a great team in place to continue on our 59-year history.”

About the Healthcare of Ontario Pension Plan

Created in 1960, HOOPP is a multi-employer contributory defined benefit plan for Ontario’s hospital and community-based healthcare sector with more than 570 participating employers. HOOPP’s membership includes nurses, medical technicians, food services staff and housekeeping staff, and many other people who work hard to provide valued Ontario healthcare services. In total, HOOPP has more than 350,000 active, deferred and retired members.

As a defined benefit plan, HOOPP provides eligible members with a retirement income based on a formula that takes into account a member's earnings history and length of service in the Plan. HOOPP is governed by a Board of Trustees with representation from the Ontario Hospital Association (OHA) and four unions: the Ontario Nurses' Association (ONA), the Canadian Union of Public Employees (CUPE), the Ontario Public Service Employees' Union (OPSEU), and the Service Employees International Union (SEIU). The unique governance model provides representation from both management and workers in support of the long-term interests of the Plan.

Let me begin by stating I have mixed feelings about Jim retiring. He definitely left an indelible mark on me and his contributions to this blog have been invaluable, not just on pension investments but more importantly, on overall pension policy.

Jim has been a very vocal leader advocating for the expansion of well-governed defined-benefit plans in Canada. Along with Hugh O'Reilly who recently resigned from OPTrust, they have been the two pension leaders who have lent their voice and expertise to an important public policy issue, namely, why we need to bolster defined-benefit plans and make them more accessible to all Canadians.

I'm not going to lie, without Jim and Hugh around, there is a deep vacuum in pension policy in this country.

Luckily, Jim told me he plans to still lend his voice to this issue and I asked him to stay in touch and possibly write some guest comments whenever he has something important to state in the future.

Jim also has mixed feelings about retiring but told me he wants to spend more time with his wife and kids now that he's still in good health and that being a CEO is a full-time job, even when on vacation.

I had seen Jim earlier this week in his offices. I went to Toronto to attend a luncheon and pension conference. I'll write all about that next week as there's a lot to cover.

Earlier this week, we spoke about his recent trip to Mexico and he really enjoyed it. I asked him if he's thinking about retirement. He told me to "stay tuned" and the next day I received the press release announcing his retirement.

Today, I told him it's going to be sad to see him go but also wished him a long and happy retirement. Jim admitted he has mixed feelings about leaving, wants to stay active on some boards but he can look back and be proud of all they accomplished at HOOPP under his tenure.

In our conversation today, we looked back at the last 20 years at HOOPP. Jim joined HOOPP in 1999. Prior to this, he had amassed extensive experience working as a derivatives trader at Merrill where he was one of the first to trade derivatives and act as a market maker when the derivatives exchanges opened here.

His extensive knowledge of derivatives served HOOPP well when John Crocker, HOOPP's former CEO, went out and hired him to be their CIO.

At the time, Nortel's weighting in the TSX had reached a high of 37% and they were looking to diversify outside of Canada. Unfortunately, there was a 30% foreign content restriction rule but Jim and his team used swaps, futures and options strategies to get around these rules. In credit, they used credit default swaps because "Canadian corporate credit was very overvalued relative to US corporate credit."

This was a "huge win in derivatives" for HOOPP but the tech bubble and bust did hit them and they went from overfunded to underfunded "in a real hurry." It didn't help that at the end of the 90s they had adopted a contribution holiday.

Still, they cut back benefits, scaled back inflation protection from 100% to 75% for a period and managed to get back to fully funded status relatively quickly.

But that experience made them strategically rethink how to manage risks more effectively. They shifted their objective from trying to beat markets to being a "pension delivery organization."

"At the time, people were treating equities like a long duration asset" but as long-term rates plunged they realized they weren't effectively managing for interest rate risk.

Remember a pension plan has three risks: equity risk, a decline in long-term rates and inflation risk and by far the most important risk is the second one, a decline in long-term rates because it disproportionately impacts liabilities in a negative way.

HOOPP started thinking completely differently, "the guiding light became all about delivering on the pension promise and every employee was thinking about matching assets with liabilities."

They bolstered their front, middle and back office systems to better manage cash and derivatives and they brought their stock and bond lending activities internally saving a lot of costs (instead of outsourcing to a custodian) and allowing them to intelligently lever up their balance sheet.

"What looks like leverage is just an inflated balance sheet. Others use custodians so it's not on their books but it's still there, we just internalized it, saving money and that allowed us to gain incremental returns."

Under Jim's watch, HOOPP has built out its funding and arbitrage strategies. They are more nimble and use derivatives extensively to hedge risks and improve their overall risk-adjusted returns.

"Out of 700 employees, roughly half are in IT, allowing us to mark all our assets to market daily and build our capabilities to move collateral and better manage our cash flows around swaps."

In other words, HOOPP is running a very sophisticated operation but the focus is very simple, to deliver on the pension promise.

However, no matter how sophisticated they are in their investment approach, Jim is adamant about conditional inflation protection. "Even in a worst-case scenario, we calculate that completely cutting inflation protection for a brief period can improve the funded status by 20%."

He told me they went to HOOPP's members and told them if they want guaranteed inflation protection, they'd have to increase the contribution rate to 14% from the current 8.5% and the members rejected this, opting instead for conditional inflation protection.

I told him that I had seen Malcolm Hamilton for dinner on Tuesday evening and he was still harping on the fact that HOOPP and other large public pensions should discount their liabilities using the government discount rate and report that figure but James Davis, OPTrust's CIO, told me that would "kill DB plans" and that's what they did in the Netherlands and hurt DB plans there as they became procyclical, de-risking at the worst possible time.

Jim said "it's even worse as they use the 10-year swap rate which went to zero" and turned "a great system" into one full of problems by making "liabilities look gigantic, rolling back pensions when they didn't need to because plans were never underfunded."

What else? We had a long discussion of how duration is not an effective measure of funded status risk, especially when rates are low, because when 10-year Government of Canada bonds went under 1%, duration was high but they took advantage to sell "all their bonds" whereas relying just on duration would have left them there. From an asset-liability standpoint, it didn't make sense to continue owning bonds at that point because as rates rose, their liabilities decreased.

He also told me (earlier this week) that they put on a big hedge in October and that saved them from taking a $7 billion hit in Q4" when equities got clobbered.

Another interesting fact I learned today, unlike other employees at large pensions, employees at HOOPP get a DB pension based on HOOPP's sustainability. They basically get to invest in HOOPP ensuring alignment of interests is there.

They can do this because HOOPP is a private trust but having a DB pension is a big perk of working at HOOPP and in my opinion more than makes up for the fact their employees are not compensated as well as the larger pensions in Canada.

Don't get me wrong, they're extremely well compensated but add in the DB pension based on HOOPP's performance and they're getting something much more valuable the longer they stay there.

Each employee at HOOPP knows the value of a good pension because they're working to serve their members delivering on the pension promise and they have skin in the game.

In closing, Jim told me he was very happy to leave the "toxic culture of investment banks" to join HOOPP because "after a while making more money doesn't get you out of bed." He said: "At HOOPP, I talk to members, I see the difference we are making and I'm grateful for this opportunity. That's really what drives me, what has driven me over the last 20 years, we are making a significant difference in people's lives."

I couldn't think of a more fitting end to our long conversation. Jim is a true gentleman, an incredible pension leader who has left his mark on HOOPP and help raise awareness on an important public policy issue. I'm sure their next leader will continue in his footsteps but I won't lie, part of me will be sad to see him go, there just aren't many leaders like Jim Keohane around.

Below, in HOOPP’s 2018 Annual Results video, President & CEO Jim Keohane discusses the Plan’s 2018 performance and explains how the Plan performed in 2018.