What investing concerns are keeping pension plan sponsors up at night?
Real estate, a long-time stable, returns-generating asset class for pension plans, may no longer be as solid due to the impact of the coronavirus pandemic.
“A pretty traditional asset class for pension plans may have been in office and retail, but one of the changes that’s happened is [the move to] remote working,” said Barbara Zvan, president and chief executive officer of the University Pension Plan, in a webinar hosted by the Association for Canadian Pension Management on Thursday. “If you think about Toronto downtown, how many of these organizations will start doing more remote working and may not need that space?”
The rise of online shopping could have a similar impact on brick-and-mortar retail, she added. “How will that impact valuations going forward and the possible growth prospects in retail? I think people have always been big internet shoppers because we’re busy, but a lot of people have gotten more used to internet shopping [during the pandemic]. . . . That [impact] will take time to work through, but it’s definitely top of mind.”
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Chris Brown, president and CEO of the Local Authorities Pension Plan in Alberta, also highlighted real estate as an obvious area of concern. The LAPP is in the process of completing a funding policy and an asset liability study with its new sponsor board, which will inform the plan’s investment policy. “The sooner we begin to understand the longer-term impacts of COVID on various asset classes in our portfolio, the better we’ll be able to make those decisions on how to restructure that.”
In terms of what keeps him up at night, Brown cited the potential impact of instability and civil unrest in the U.S. on equity markets in the later months of this year, particularly with a tense election coming up, as well as the pandemic’s hit to the Alberta economy and how it could affect the provincial public sector. “There’s a lot of moving parts for us right now and it’s both a challenge and an opportunity to be working all these pieces together.”
For Newfoundland and Labrador’s Public Service Pension Plan, its 2019 results came out before the pandemic hit, so “there were a lot of smiles around the table in regard to the asset returns and 2019 in general,” noted Chuck Bruce, CEO of Provident10, the plan’s administrator.
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After the pandemic-related market volatility, he asked the plan’s chief investment officer for an outlook of when it would return to the rosy returns of 2019. “I don’t think either one of us at that time felt it would be August of 2020. With things almost back to where they were in 2019, it’s a little surreal and almost feels preliminary.”
While the pandemic has certainly affected pension funds, Zvan said it’s an opportunity to take stock. “By portfolio components, overall, did they react as I thought they might? Did [the plan] have the liquidity I thought I would have had through a stress [event]? . . . When you made plans for disaster recovery or times of stress, did it actually work out?”
She said the crisis has given plan sponsors a new stress test to consider for the future. “Most of us were trained in business schools that were more about just-in-time efficiency and maximizing our [profit and loss], [but] I think that theme of resiliency will also come out in risk management going forward.”
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