Fully Funded CAAT Pension Plan Gains 11% in 2020

At the end of 2020, a year of exceptionally volatile and unpredictable markets due to the coronavirus pandemic, the Colleges of Applied Arts and Technology pension plan was 119 per cent funded with $3.3 billion in funding reserves and its assets had grown to $15.8 billion from $13.5 billion on Jan. 1, 2020.

“In the heart of the pandemic, we were down maybe one per cent from a funded ratio perspective,” says Derek Dobson, chief executive officer and plan manager at the CAAT. “By the end of the year, we grew our reserves by more than 10 per cent . . . and that’s even more remarkable because we lowered our discount rate [to 4.95 per cent from 5.15 per cent]. It was a banner year from a pension plan health perspective.”

The plan delivered an annual return of 11.1 per cent in 2020, outperforming its policy benchmark by 0.4 per cent, which nudged its 10-year net return up to 9.9 per cent. Over those 10 years, the plan provided cumulative added value of $1.7 billion relative to the benchmark. “Everything we do is for the long term, so even though we’re very happy about our 2020 results, our chief investment officer and I talk about our 10-year numbers more than we talk about our one-year numbers.”Dobson attributes the plan’s solid performance to robust asset-liability modelling and scenario planning. When the industry was speculating last year about what shape the recovery would take, he says, the CAAT went through a whole alphabet of potential outcomes. It concluded that, in every scenario, the asset mix and reserves would provide an adequate buffer.

One reason is the plan’s strong focus on strategic risk management. Its investment team works with the board to systematically build in risk management levers — essentially a toolkit of risk management strategies that are ready to use when required.

The plan’s liquidity management strategy also made a concerning year less stressful, says Dobson. “We went into the pandemic with a lot of focus on liquidity, so we never got into the yellow zone. We were in the green zone the whole time.”

On May 1, 2021, the plan transitioned from retiring CIO Julie Cays to incoming CIO Asif Haque, who’s been with the CAAT for 11 years. His history with the organization means he’s deeply familiar with both the investment team’s approach and the organization’s growth program, which centres around DBplus, a fixed-cost plan that was launched in 2019 to allow employers to join a defined benefit plan.

“He has strategic vision, skills, experience and the right mindset in that he knows the investment program is built to deliver the pensions,” says Dobson of Haque. “One of my most important goals for 2021 is to ensure his transition is as smooth as possible.”

Haque will take responsibility for deploying the assets that flow in through DBplus, which, as of July 2021, was serving more than 125 employers and just over 70,000 members. Those additional assets enhance the plan’s long-term sustainability, says Dobson, and also allow the plan to write bigger cheques.

“[That] might be the difference between . . . being able to partner on a co-investment because they’re looking for somebody who can write a $100 million cheque instead of a $15 million cheque,” says Dobson. “Growth in assets has allowed us to get more seats at more tables and participate for the benefit of our whole membership.”

Ultimately, he believes it’s critical to address the factors that have deterred organizations from offering DB pensions, including changing accounting standards that made the plans a volatile expense on the balance sheet and the risks associated with running a plan as a single employer. It’s also essential to future-proof pensions by designing DB plans that look decades ahead and take into account evolving industries, work structures, salary models and regulatory requirements, he adds.

“If our success [with DBplus] leads to other innovations from other groups, I’m happy as well. Our goal is not to be the biggest. . . . It’s about making the whole system better.”

This is an excellent interview with Derek Dobson, president & CEO of CAAT pension Plan.

Earlier today, I emailed Derek to see if I can chat with him about this article but he's tied up in Board meetings and getting ready to take a couple of days off.

No worries, the article covers the important points and I have a lot to cover going over 2020 results

First, while CAAT Pension Plan is smaller than its larger Canadian peers, it's growing fast but most importantly, it is designed very well, incorporating key elements that have led to its success.

Like what? Like good governance, great communication, joint sponsorship and risk sharing to ensure the Plan is sustainable over the long run. 

And of course, there's a great team managing the assets now led by Asif Haque, the new CIO who took over from Julie Cays starting in May.

In April, CAAT Pension Plan quietly announced its results for 2020, returning a net 11.1% in the year ended Dec. 31, the $C15.8 billion ($12.4 billion) pension plan announced in its annual report released Wednesday.

The one-year net return exceeded its 10.7% policy benchmark return. In the five and 10 years ended Dec. 31, the pension fund returned an annualized net 10.2% and 9.9%, respectively, above the respective benchmarks of 8.8% and 8.5%.

In the year ended Dec. 31, 2019, the pension fund returned a net 16%, equal to its policy benchmark.

By asset class, emerging markets equities had the highest return for the year ended Dec. 31, with a net return of 19.7% (above its 16.2% benchmark), followed by private equity at a net return of 17.6% (above its benchmark of 17.2%).

Other asset class returns were: Nominal long-duration fixed income, returning a net 13.5% (above its 11.9% benchmark); real-return fixed income, with a net return of 13.1% (equal to its benchmark); global developed equities, at a net return of 11.8% (below its 13.9% benchmark); nominal universe fixed income, a net 9.9% (above the 8.7% benchmark); real assets, 7% (5%); and commodities, -21.8% (-25.1%).

As of Dec. 31, the actual allocation was: 29.2% global developed equities; 18% nominal long-duration fixed income; 14.7% real assets; 13.2% private equity; 10.2% emerging markets equities; 5% commodities; 4.8% real-return fixed income; 4.6% nominal universe fixed income; and 0.3% cash, cash equivalents and other.

I say quietly announced because I wasn't made aware of the release of the results and many media outfits didn't cover them in detail, but they are excellent, especially from a long-term perspective. 

The bulk of the results can be explained by a very well diversified asset mix which invests in global bonds and stocks but also in private markets like private equity, real estate and infrastructure. 

CAAT manages these assets internally and through strong strategic partnerships with external managers, leveraging off these partnerships.

I strongly recommend you take the time to read CAAT Pension Plan's 2020 Annual Report to get a lot of the details. 

For me, here is the most important indication that CAAT Pension Plan remains very healthy:

Yes, the investment team is adding value, beating its policy portfolio benchmark in the short and long run but what ultimately matters is the Plan's funded status.

The Plan is 119% funded on a going-concern basis based as at January 1, 2021, an improvement from 118% last year. Being 119% funded means they have set aside $1.19 for every dollar of pension promised to their members.

 And Derek Dobson being an excellent actuary knows this well, stating this in the interview above:

“In the heart of the pandemic, we were down maybe one per cent from a funded ratio perspective,” says Derek Dobson, chief executive officer and plan manager at the CAAT. “By the end of the year, we grew our reserves by more than 10 per cent . . . and that’s even more remarkable because we lowered our discount rate [to 4.95 per cent from 5.15 per cent]. It was a banner year from a pension plan health perspective.”

Not only did they grow net assets, they dropped their discount rate to 4.95% from 5.15% to grow their reserves in case they hit a storm.

This is smart planning, above and beyond risk management and good investment management, at the heart of every fully funded pension plan is a strong funding policy, and CAAT Pension Plan has it:

Not only is this great news for those new members who are now part of a well-governed defined-benefit plan, it's also great news for existing members and retirees.

In the interview above, Derek states those additional assets enhance the plan’s long-term sustainability, allowing it to write bigger cheques for co-investments to reduce fee drag in private equity while maintaining a strong allocation to the asset class.

Bigger and better co-investments are critical to add significant value over the long run.

Alright, take the time to read CAAT Pension Plan's 2020 Annual Report to appreciate how well this Plan is being run.

I'll leave it for another time to go over some details on liquidity risk management and more the next time I get a chance to talk with Derek and Asif. 

Below, hear from Derek W. Dobson, CEO and Chief Investment Officer, Asif Haque, as they review CAAT's performance in 2020 and discuss how CAAT has stayed strong despite one of the most tumultuous years in recent history. 

Great webinar, take the time to watch it (every CEO and CIO should do this for their members every year).

By the way, now I remember why I didn't cover the results earlier, it's because I waited for the annual webinar for members to come out in May and John Cappelletti recently retired from the organization so I wasn't plugged into the latest news. Wish him and Julie Cays a happy retirement.