{"id":18706,"date":"2020-06-17T09:00:24","date_gmt":"2020-06-17T13:00:24","guid":{"rendered":"https:\/\/www.benefitscanada.com\/news\/downside-protection-strategy-saves-lapp-1-9-billion-147098"},"modified":"2020-06-17T09:00:24","modified_gmt":"2020-06-17T13:00:24","slug":"downside-protection-strategy-saves-lapp-1-9-billion","status":"publish","type":"post","link":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/2020\/06\/17\/downside-protection-strategy-saves-lapp-1-9-billion\/","title":{"rendered":"Downside protection strategy saves LAPP $1.9 billion"},"content":{"rendered":"
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Yaelle Gang, the Canadian Investment Review<\/span> | June 17, 2020 <\/p>\n

The volatility caused by the coronavirus pandemic made the first quarter of 2020 rough for many Canadian defined benefit pension plans.<\/p>\n

In early June<\/a>, the Local Authorities Pension Plan Corp., which is mandated to invest with the Alberta Investment Management Corp., said it began the year with $50.6 billion in assets under management and ended the first quarter with $47.2 billion. But, while an approximately 6.5 per cent reduction to the size of the fund is a hard hit, the results would have been much worse if it wasn\u2019t for a downside protection strategy the LAPP that reversed about four per cent of losses and saved the fund almost $1.9 billion.<\/p>\n

The LAPP Corp. only became the legal trustee and administrator of the pension plan on March 1, 2019. Until then, the president of the Alberta Treasury Board and the province\u2019s minister of finance was the plan\u2019s legal trustee and administrator.<\/p>\n

Read: LAPP reporting $3.4-billion loss in first quarter of 2020<\/a><\/strong><\/p>\n

Following the change, the new sponsor board was given a two-year period to work on articulating its risk appetite and developing a new funding policy, says Chris Brown, the LAPP\u2019s president and chief executive officer.<\/p>\n

\u201cAs we worked on the work plan with that board it became clear that it was going to take some time, as you would expect, because that work would be quite foundational to then an asset-liability study for the plan and perhaps modifications of our investment policy. It also became clear that, in the context of where we were in 2019 \u2014 a decade or more into a long-standing bull market [with] the plan in very good health from a financial perspective \u2014 the risk to us, as we saw it, was something dramatic changing, which would then, potentially at least, take some options off the table for the sponsor board to consider as we looked at implementing that new funding policy.\u201d<\/p>\n

The LAPP\u2019s goal was to provide time for the board to do that work without worry about the impact of a material market event on the plan\u2019s assets limiting their options, so it decided to implement a downside protection strategy, notes Brown.<\/p>\n

\u201cAs we map out the funding policy for the plan \u2014 and potentially the future design of the plan, the future membership of the plan, because the sponsor board also has authority over the admission of new employers and members into the plan \u2014 we wanted to ensure that they had the ability to take the plan in whatever direction was open to them by virtue of the legislation, without being restricted by a severe market event.\u201d<\/p>\n

Read: Are institutional portfolios prepared for the next market tumble?<\/a><\/strong><\/p>\n

The global financial crisis of 2008\/09 dramatically impacted the funding of the plan, he adds. \u201cIt put the plan in a significant underfunded position, like it did most defined benefit plans, and it took the plan basically a decade to begin to get back to full funding and to start bringing down those contribution rates that had to escalate quite dramatically after the financial crisis.\u201d<\/p>\n

To prevent another situation like the global financial crisis, the LAPP examined a number of options and worked with the AIMCo to implement the downside protection strategy at the beginning of 2020, just shortly before the market crashed due to the coronavirus. \u201cWe didn\u2019t have a crystal ball, but some might say fortune favours the bold,\u201d says Brown. \u201cI think we say fortune favours the prepared.\u201d<\/p>\n

While the LAPP was about 119 per cent funded at the end of 2019, it was still 109.6 per cent funded at the end of the first quarter of 2020. \u201cAs we look forward, we are already considering whether we want this strategy, which is time-limited, to continue and what is the rationale for doing something like that?\u201d<\/p>\n

The original rationale was to ensure stability while other decisions were ongoing, he adds, but looking forward, it may make sense to continue to pursue the downside protection strategy. \u201cIt provides an opportunity to think about funding from a risk management perspective, which is an ongoing process for us, as it is for most plans.\u201d<\/p>\n

Read: How defensive strategies played out for CN Rail pension, ATRF as markets crashed<\/a><\/strong><\/p>\n

Read the full article at BenefitsCanada.com<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

Yaelle Gang, the Canadian Investment Review | June 17, 2020 The volatility caused by the coronavirus pandemic made the first quarter of 2020 rough for many Canadian defined benefit pension plans. In early June, the Local...<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[],"tags":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/18706"}],"collection":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/comments?post=18706"}],"version-history":[{"count":0,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/posts\/18706\/revisions"}],"wp:attachment":[{"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/media?parent=18706"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/categories?post=18706"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.lifeinsurance-orleans.ca\/index.php\/wp-json\/wp\/v2\/tags?post=18706"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}