The Healthcare of Ontario Pension Plan (HOOPP) announced today that it generated an 11.42% rate of return in 2020. In addition, it surpassed the $100 billion asset milestone, closing the year at $104.0 billion in net assets, up from $94.1 billion at the end of 2019. The Plan’s funded status is 119%, meaning that for every dollar it owes in pensions it has $1.19 in assets.
HOOPP has a 10-year annualized rate of return of 11.16%. In its latest report, consulting firm CEM Benchmarking found that HOOPP’s 10-year results were among the highest of pension plans worldwide, and was highest among CEM’s Canadian data set of 66 pension funds.
“HOOPP is very pleased to have delivered strong results for our members in the Ontario healthcare sector, and to have done so during what remains an extremely challenging time for them,” said Jeff Wendling, President and CEO, HOOPP. “It is a privilege to be the pension plan for healthcare heroes and our top priority is to ensure their pension remains safe and secure.”
Throughout 2020, HOOPP’s investment team successfully navigated volatile markets. The returns from the fixed-income and public equities portfolios were especially strong, and the real estate portfolio performed very well compared to its benchmark. The Fund’s liquidity management capabilities helped HOOPP act on significant buying opportunities to further strengthen the Fund.
Wendling added: “Being able to achieve these results in such a tumultuous year highlights the resilience of our highly diversified fund and long-term investment management approach. I am proud of what our team was able to accomplish last year for our members.”
Thanks to the strong results in 2020 and in previous years, HOOPP’s Board of Trustees has approved a benefit improvement for members. Effective April 1, members who were active in the Plan as of that date will receive an increase to their annual lifetime pension for any contributory service in the Plan in 2018, 2019 and/or 2020. Learn more about the details of this change.
The Plan’s strength also allowed HOOPP to provide a cost of living adjustment (COLA) in 2020 for our retired and deferred members to help their pensions keep up with rising costs.
HOOPP continues to evolve its investment strategies to adapt to the current low interest rate environment. This includes adjusting the Fund’s asset composition and continuing to find new ways to further diversify the portfolio. This is an evolution of the liability-driven investment (LDI) approach that has served HOOPP well for many years. At the core of this investment approach is matching assets with liabilities, which ensures HOOPP takes a long-term view and invests solely with its members’ pensions in mind.
In addition to delivering strong results, HOOPP continued to provide a high level of service to members while operating efficiently. Operating costs for the year represented just 0.31% of assets. Wendling said: “For all our members have to worry about right now, they don’t have to worry about their pension. While we remain in a period of economic uncertainty, HOOPP’s long track record of positive returns and low costs helps set a solid foundation to ensure that the Plan can pay pensions to members today and in the future.”
About the Healthcare of Ontario Pension Plan
HOOPP serves Ontario’s hospital and community-based healthcare sector, with more than 610 participating employers. Its membership includes nurses, medical technicians, food services staff, housekeeping staff, and many others who provide valued healthcare services. In total, HOOPP has more than 400,000 active, deferred and retired members.
HOOPP operates as a private independent trust, and is governed by a Board of Trustees with a sole fiduciary duty to deliver the pension promise. The Board is jointly governed by 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). This governance model provides representation from both management and workers in support of the long-term interests of the Plan.
I want to begin by praising HOOPP's tireless members, both active and retired members who came out of retirement to join other frontline workers battling the pandemic.
As I keep reminding people reading this blog, pensions are first and foremost all about people, not investments, and giving members peace of mind that their retirement is well managed and secure over the long run.
On that front, HOOPP came through for its members once again last year, a year where Ontario's healthcare workers needed all the support they can get.
Any way you slice it, HOOPP's 2020 and long-term results are stellar, reassuring their members that their pension plan is delivering on its pension promise, now and over the long run.
Early this afternoon, I had a virtual meeting with HOOPP's CEO Jeff Wendling to discuss the 2020 results. I thank him and James Geuzebroek for arranging this discussion.
Before I get to our discussion, I'd like to go over some things in HOOPP's 2020 Annual Report.
As always, please take the time to read this report and other annual reports if you really want to understand Canada's large pensions in detail.
Alright, right at the top of this year's report is a big well-deserved "Thank You" to all of HOOPP's members:
Like I said above, pensions are all about people, show your members the respect they deserve.
Next, some of the key highlights of 2020:
The most important point here isn't returns, it's that HOOPP remains fully funded and pushing up against the limit the Canada Revenue Agency allows for pension surpluses.
And this year they rightly decided to use some of that surplus to increase benefits:
Effective April 1, members who were active in the Plan as of that date will receive an increase to their annual lifetime pension for any contributory service in the Plan in 2018, 2019 and/or 2020. Learn more about the details of this change.
The Plan’s strength also allowed HOOPP to provide a cost of living adjustment (COLA) in 2020 for our retired and deferred members to help their pensions keep up with rising costs.
I don't know of any pension plan in the world that increased benefits in the midst of the pandemic, it speaks volumes as to how incredibly managed this plan has been over the long run.
Next, unlike other more mature plans, HOOPP is relatively young and its membership and the number of employers offering the plan are growing:
You know my thoughts on well-governed DB pensions, we aren't covering enough Canadians and this is a real shame.
If it were up to me, all of Canada's healthcare workers including doctors would be members of HOOPP's pension plan. Period.
Next, I read Dan Anderson (Chair) and Adrian Foster's (Vice Chair) message (page 19) and note this on ensuring HOOPP is well-positioned for the long run:
To make sure the Plan remains healthy for our members today and in the future, we need to continually adapt and evolve with the changing investment landscape. In addition to actively monitoring performance, our Board is providing oversight on enhancements to HOOPP’s investment strategy, including the evolution of its signature liability-driven investment approach. In 2020, HOOPP also continued to improve and refine its already-robust risk management practices and systems by enhancing technology and hiring a Chief Risk Officer who will head a new division focused on assessing, measuring, modelling, and reporting on risk. Taken together, these measures will help ensure that the Plan is properly positioned to generate the returns needed to pay pensions for the long term.That new Chief Risk Officer is Saskia Goedhart who joined HOOPP six months ago and she's as solid as they get:
In our conversation, Jeff Wendling praised her (and I praised him for hiring her) and said risk management will remain a cornerstone of all HOOPP's investment activities.
Now, let me move on to Jeff Wendling's message in the Annual Report and it's worth reading it all:
The past year has been a challenging time for all of us, particularly our HOOPP members. Healthcare workers faced the staggering public health crisis resulting from the COVID-19 pandemic with courage and unwavering commitment, and we want to express our deepest appreciation for all they have done and continue to do.
We have always taken great pride in helping those who do so much to help each of us, and these events have only reinforced the strength of our commitment. We have focused on ensuring our members’ pensions are kept safe and secure, and on providing service in a seamless way. It is our privilege to be able to support our members by keeping HOOPP operating smoothly at all levels.
Our first priority in this regard is to ensure that HOOPP delivers on our pension promise to you. We are pleased to report that as at Dec. 31, 2020, the Plan remains more than fully funded, with a funded status of 119%. In other words, the Plan has $1.19 in assets for every $1 that is owed in pensions.
A history of solid investment performance
The Fund’s net assets rose to an all-time high of $104 billion, as at Dec. 31, 2020, representing an annual rate of return of 11.42%. Being able to generate this investment return in such a tumultuous year highlights the strength of our liability-driven investment (LDI) approach and the resilience of the Fund. Through the course of the year, our investment team successfully navigated large and sudden swings in the markets, including one of the steepest declines ever in mid-March as investors around the world reacted to the impact of the COVID-19 pandemic.
In its latest report for 2019, external consulting firm CEM Benchmarking found that HOOPP’s 10-year results were among the highest of pension plans worldwide. At the same time, our investment costs and overall risk profile continue to be among the lowest of our peers. Our long track record of positive returns and low costs helps set a solid foundation to ensure that the Plan can pay pensions to members today and in the future.
Positioning HOOPP for the future
To continue delivering on our pension promise, we need to ensure that we invest for the long term. This includes adapting our investment strategies as the market environment changes. In 2019, we began the process of evolving our LDI strategy, which has served HOOPP extremely well since it was launched in 2007. LDI is usually defined as matching Plan assets to pensions owed in the future or, in other words, the Plan’s liabilities. This approach keeps our focus on our members and helps ensure that we are generating the returns needed to pay pensions without taking on unnecessary risk.
Bonds have traditionally played a key role in our LDI strategy, providing reliable returns while protecting the Fund against sharp corrections in equities. However, as interest rates have declined sharply, we have made changes to our Fund’s investment portfolio, and continued to add new assets and strategies. This includes infrastructure investments, which we think will serve us better in this low-interest-rate environment. This is an ongoing process that also includes evaluating opportunities to diversify the Fund’s international holdings, particularly in high-growth parts of the world. We will work to ensure that our LDI strategy continues to evolve and adapt to changing markets and investment environments.
As global markets and investing become more complex, it is vital that we ensure our risk management practices continue to grow along with our Fund. In 2020, we began implementing a new risk system that will offer several benefits, including modelling for multiple asset classes, additional tools to calculate risk measurements, the ability to rapidly test the impact of market changes and respond to them, and more flexible and enhanced reporting.
Along with this enhanced technology, we have centralized our risk functions by introducing a new Risk division and hiring Saskia Goedhart as our first Chief Risk Officer. This division will ensure our risk systems, practices, and monitoring continue to evolve to meet our future needs while providing expertise and comprehensive risk reporting to the Board. This marks a very important milestone for HOOPP. While we have always managed risk effectively, adding Saskia to the team and building out our risk function will enable us to expand and improve our capabilities as the Fund continues to grow in size and complexity. With these changes, we will be well-positioned going forward.
Sustainable investing (SI) at HOOPP is also about delivering on our pension promise in a way that aligns with our values and promotes strong relationships with our stakeholders. This includes investing practices that integrate Environmental, Social & Governance (ESG) factors into our analysis, strategy, and asset management practices. In 2020, our ESG internal advisory group developed a comprehensive framework to ensure consistency with the responsible investing approach that we have followed and applied in our organization for many years: integration, stewardship, and fostering the sustainability of our communities and capital markets.
We also released a joint statement with eight of Canada’s leading pension plan investment managers, representing $1.6 trillion in assets under management, calling on companies to provide relevant and consistent ESG information that enables us as an investor to allocate capital to investment best placed to deliver long-term sustainable value creation. We are enthusiastic about these first formal steps, and we will undoubtedly have more to share about our SI efforts as this area continues to grow in importance in the coming years.
Supporting equity, diversity and inclusion
Similarly, all around us we see an urgent push for change in the area of diversity and inclusion. We know that we don’t have all the answers today, but our leadership is committed to learning, growing and doing what’s right for all our employees, members and broader community.
In July 2020, I signed a CEO pledge on behalf of HOOPP to support the BlackNorth Initiative. This initiative is committed to removing systemic barriers negatively affecting the lives of Black Canadians in corporate Canada. The pledge includes commitments such as fostering an open environment, increasing Black representation within our organization (including at senior levels) and creating a diversity leadership council. As part of this pledge, I reached out to many of our vendors and partners to encourage them to consider joining us in this initiative.
More broadly, we want to ensure that HOOPP’s diversity efforts help promote a respectful and inclusive workplace culture for everyone regardless of race, ethnicity, gender, age, religion, disability, and sexual orientation. In 2020, we launched Employee Resource Groups to provide employees with a way to participate in and engage with this important effort to better our organization. Many employees have signed up, and we are excited to have these groups help guide our diversity efforts at a grassroots level going forward.
We have also enhanced our recruitment practices and developed a new Equity, Diversity and Inclusion policy to formalize our longstanding practices. In addition to ensuring that everyone at HOOPP feels safe, respected, and valued, these efforts make our organization stronger.
Inspired by our members
These milestones and accomplishments come as HOOPP marks its 60th year of delivering on the pension promise for members. Since 1960, we have seen tremendous change — in the healthcare field, in financial markets and investing, and in Canadians’ working lives and savings habits. Over this period, the importance and value of a defined-benefit pension such as HOOPP have become increasingly clear.
We have evolved to keep up with the times by adding employers and members to the Plan and continually adapting our investment strategies, technology, and overall operations to effectively manage the growth of the HOOPP Fund. Through it all, we have remained dedicated to our mission of providing pensions to members. This has driven our organization forward in the past and continues to do so under my leadership.
Reflecting on my first full year as leader of this organization, I am extremely pleased with the way we have been able to keep our organization moving forward smoothly in unprecedented circumstances. I would like to thank the Board of Trustees for their support and guidance, our Executive Team for their leadership, and HOOPP staff for their hard work and commitment.
We have ample reason to feel proud, and even cautiously optimistic, as we move forward from a tumultuous year. Though there is surely more uncertainty ahead, my hope is that we can continue to take our inspiration from our members in our commitment to provide them with a secure pension and peace of mind.
This is an excellent message, one I read a few times as it covers the most important developments at HOOPP.
One thing I am very keen on is diversity and inclusion, not just for portfolio companies but at the actual pension plans and funds I cover, so I was pleased to learn this:
More broadly, we want to ensure that HOOPP’s diversity efforts help promote a respectful and inclusive workplace culture for everyone regardless of race, ethnicity, gender, age, religion, disability, and sexual orientation. In 2020, we launched Employee Resource Groups to provide employees with a way to participate in and engage with this important effort to better our organization. Many employees have signed up, and we are excited to have these groups help guide our diversity efforts at a grassroots level going forward.
A respectful and inclusive workplace culture doesn't just come from hiring people who look, walk and think differently, it comes from the top and permeates all the way down to the bottom and it requires a lot of hard work, at least initially.
You need to incorporate everyone's views, starting from the bottom, so I am very pleased that HOOPP launched Employee Resource Groups to provide employees with a way to participate in and engage in these sometimes difficult discussions and I encourage all the employees and senior managers to take this group seriously (every organization needs to do this, not just Canada's large pensions, it's the only way to ensure a diverse and inclusive workplace).
Why is this important? It's important to acknowledge that there are people in our society that are being systematically discriminated against because of their race, ethnicity, gender, age, religion, disability, and sexual orientation.
Apart from the moral aspect, addressing diversity and inclusion in a holistic, transparent and comprehensive way also allows organizations to move forward, to enhance their culture and it pays long-term dividends, in a lot more ways than the bottom line.
I also firmly believe in helping those in need in our society, especially the poor, disenfranchised and disadvantaged groups who need a helping hand.
That's what HOOPP's members do on a daily basis as part of their job, but that's what we all need to do as part of being good citizens who take care of each other.
Alright, let me dive right into HOOPP's investment returns in 2020.
The table below shows the net investment income of HOOPP's two major portfolios -- the Liability Hedge Portfolio and the Return Seeking Portfolio -- over the last two years (page 42 of Annual Report):
As shown, the bulk of the net investment income came from nominal and real return bonds in the Liability Hedge Portfolio, and Public and Private Equities in the Return Seeking Portfolio.
Keep in mind, just like Ontario Teachers' Pension Plan, HOOPP does a lot of bond repos to leverage its massive bond portfolio but this is more balance sheet leverage, not to fund activities of other assets (at least not yet, it's a little complicated but both plans use various sources of leverage to enhance liquidity and returns).
The table above, however, doesn't tell us much about active management, that is the added value that HOOPP's managers add above their respective benchmarks.
Jeff Wendling and I actually had a chat as to maybe it's time to scrap this particular table or add a new one that shows net annualized returns by asset class and benchmark returns too, like what other pensions do (I understand that this is how they traditionally have shown returns but it makes sense to add a more detailed one with net annualized returns for each portfolio relative to benchmarks).
Still, right under this table, they explain sources of returns for active management:
The total Fund return of 11.42% exceeded the benchmark return of 9.80% by 1.62% or $1,513 million. This active management return, or value added, came from a variety of sources during the year within both the Liability Hedge Portfolio and Return Seeking Portfolio. The Liability Hedge Portfolio generated $1,136 million with a significant contribution coming from short-term, nominal bonds and real estate. The Return Seeking Portfolio generated the remaining $377 million, with the largest impacts coming from private equity, credit and absolute return strategies.
And they provide details on each portfolio which I encourage you to read (pages 43-48).
Given what has been going in real estate portfolios, my attention immediately went to that asset class:
At year-end, our real estate portfolio had a gross market value of $15.5 billion versus $14.6 billion at the end of 2019. Despite the pandemic causing global commercial real estate transaction volumes to decline by over 30% from 2019 levels, our transaction activity during the year included approximately $2.1 billion in new investments and commitments. Dispositions of non-core assets totaled $340 million.
Over the last five years, our real estate portfolio generated a currency-hedged return of 8.2%, $1.8 billion over the benchmark. In 2020, the portfolio produced a return of 0.2% on a currency-hedged basis, and $499 million in value added.
The key factors impacting returns were:
- Negative impacts on our Canadian retail holdings: Ongoing headwinds from e-commerce on shopping malls were exacerbated by the pandemic’s impact on in-person shopping.
- Negative impacts on our office portfolio: The income return from this portfolio was offset by value adjustments to reflect that office users are not likely to start returning to the office in material numbers until later in 2021, which will increase near-term leasing risk. We expect this to normalize once COVID vaccinations are widely distributed.
- Very strong performance of our industrial and logistics portfolio: Across North America and Europe, this portfolio performed very well.
- Increases in the value of our land holdings and developments in progress this year: This also includes the effect of changing our fair value estimation from the cost approach to the more commonly used appraised value methodology.
In 2020 we put several building blocks in place that will drive future growth as we continue to increase the scale and scope of our real estate portfolio. Examples include:
- commencement of over 5 million square feet of new development projects, with an estimated completion value of $1 billion
- entry into strategic partnerships with leading specialists in the apartment, student housing, and industrial sectors in the U.S. to drive growth in that market.
The following charts illustrate the global diversification and property type mix of HOOPP’s real estate portfolio. We continue to expand our non-domestic portfolio, which grew by over $900 million and now represents 35% of our portfolio compared to 31% at year-end 2019. We also continue to expand our industrial footprint, where secular growth prospects and market fundamentals continue to be very positive. Our global industrial holdings grew by $1 billion and represent 32% of the portfolio, up from 27% at the start of the year. We also acquired key land sites in Canada, the U.S. and Europe totaling over 13 million square feet of development potential, which will drive further long-term growth in this sector.
It's important to note HOOPP started diversifying its real estate holdings by geography and by sector before the pandemic hit, and it continues to do so.
In fact, it's one of the biggest owners of logistics properties in Canada and has done a lot of deals domestically and abroad in this area (they will do more). And they have 16% in residential (multifamily).
Like CDPQ's CEO Charles Emond who I spoke with on Monday, Jeff Wendling told me there was a huge dispersion of returns between and within asset classes last year "so diversification everywhere" really helped mitigate downside risk.
What else did we chat about?
Like his predecessor, Jim Keohane, Jeff Wendling is a CIO at heart.
He explained to me in detail what happened last year, how the Fund was positioned defensively going into 2020 and when rates dropped to record lows, they started selling off their bonds and continued selling (around 20% of their bond holdings).
He explained that in March when markets plunged, they were holding daily investment meetings to capitalize on dislocations in public markets as stocks plunged and credit spreads blew up.
They were buying everything, S&P 500, TSX, EFEA, Emerging Markets, preferred shares on Canadian banks, high yield bonds, structured credit, etc.
As Jeff explained it to me, markets snapped back quickly but they were still able to invest a considerable amount in a short time.
[Lesson to all pensions: When it hits the fan, let your senior investment managers make quick decisions, they need to be quick and nimble to capitalize on opportunities.]
Jeff was careful to explain to me that selling bonds wasn't part of a big tactical call on inflation, but rather a "required return call as yields on long bonds fell near zero."
On this point, please refer to a prior comment of mine on HOOPP's LDI strategy 2.0 where we discussed moving away from bonds into infrastructure, hedge funds, credit, insurance-linked notes, quant programs and more.
HOOPP is already huge and growing fast. Jeff Wendling has to manage that growth carefully and judiciously but they are still early in the growth game.
In infrastructure, they started investing and co-investing with funds and will do directs but it's a new asset class and the J-curve will weigh on those returns in the near term.
Private Equity is steady, they invest and co-invest with funds but Jeff told me 65% is fund investments and 35% is directs and co-investments but as the Fund grows and they want to maintain allocations and reduce fee drag, they will need to increase co-investments.
They also do private credit deals but structure their loans in a way to protect against downside risk (remember the Home Capital fiasco, they made a killing on that deal).
I think the most important takeaways I got from my conversation with Jeff Wendling is that HOOPP is growing, they're going to hire more investment professionals, they're going to grow investment activities all over the world as they expand their LDI beyond bonds but they're going to do so in a measured way focusing on risk first and foremost.
That's why HOOPP's new Chief Risk Officer Saskia Goedhartand her team are going to play a critical role as they manage the growth into new activities.
Jeff and I talked about my view that everything is overvalued. Jeff's observation is that most assets are at an all-time high, so it may be indicative that some assets are indeed overvalued. Regardless, we agreed that it’s very important right now that the strategy, execution, approach, partnerships, platforms, etc. all have to be aligned to get the right outcome.
I have no doubt HOOPP will continue delivering exceptional returns as it grows it doubles its assets over the next seven to ten years, delivering on its pension promise for decades to come.
Will there be bumps along the way? You bet, there always are, but they are more than capable of managing these risks as they arise, maintaining their long-term focus.
One big advantage (and disadvantage) Jeff and his team have is they're starting from scratch on many new activities so they can take their time and avoid investing where challenges remain.
Lastly, since I get this question every year, what about compensation at HOOPP?
Compensation at HOOPP is very competitive, on par with its peers, but because it's a private trust and not a public pension, they don't publish executive compensation in their annual report.
I'm a stickler for transparency and believe because HOOPP manages the pension assets of captive clients, they should start publishing executive compensation in their annual report like Canada's large public pensions do (they all earn their comp, it should be public).
One big advantage HOOPP's employees have is they get to invest in their pension plan alongside their members, ensuring alignment of interests but also ensuring they receive the same benefits and peace of mind that come from a secure, well-governed defined-benefit pension plan.
Also, on currency risk, HOOPP fully hedges its currency risk which helped it last year as the Canadian dollar gained on the greenback.
Alright, let me wrap it up here. Please take the time to read HOOPP's 2020 Annual Report for all the details I couldn't cover here, especially investment activities of different portfolios.
Once again, I thank Jeff Wendling for taking the time to talk to me and James for arranging this chat.
I enjoy these discussions with CEOs/ CIOs so much that I wish I can do a panel discussion twice a year but that's a lot of work, preparation and probably impossible to coordinate.
What I tell them is what I tell you, my blog is a great platform to share ideas and progress. Its success completely depends on the input people are willing to share publicly.
Below, Amanda White of Top1000funds interviews HOOPP's CEO Jeff Wendling on liability driven investing 2.0. You can also listen to the podcast here, it's excellent.
Next, Jeff Wendling, president and CEO of the Healthcare of Ontario Pension Plan joins BNN Bloomberg to discuss their 2020 results. The company posted an 11.4 per cent return and is looking to expand internationally. Wendling says they have found opportunities to invest in emerging markets during the COVID-19 crisis (see it here if it doesn't load below).
Also, learn about the peace of mind you’ll get from having a lifetime pension and learn about the benefits of keeping your pension with HOOPP and the risks associated with taking it out of the Plan.
Lastly and most importantly, a huge thank you to all healthcare workers across Canada and the world, we owe you a lot for everything you've done and are doing to get us through this pandemic.