Canadian multiemployer pension funds are expanding into more alternative investments, and that is bringing the C$88 billion ($70.8 billion) market new attention from consultants and money managers.
The expansion into infrastructure, private equity and real estate is the latest result of a two-year shift by multiemployer plans — ranging in size from C$250 million to C$1 billion — away from traditional 60% equity/40% fixed-income allocations or even, in some cases, a single balanced fund, sources said. These plans are following the lead of larger multiemployer plans that made the move earlier.
The interest in alternatives — particularly infrastructure — from multiemployer plans reflects broader institutional investor attitudes in Canada. A Greenwich Associates study late last month of Canadian public and corporate pension funds, endowments and foundations showed that over the next three years, 36% planned to increase their infrastructure investments.
Among larger multiemployer plans, the 7% allocation to infrastructure at the C$8.6 billion Colleges of Applied Arts and Technology Pension Plan, Toronto, helped deliver an 8.1% return in 2015, while the C$6 billion Laborers' Pension Fund of Central and Eastern Canada, Oakville, Ontario, returned just over 10% in 2015 on the strength of its 25.1% allocation to alternatives, which includes an 8.1% allocation to infrastructure, the funds' data show.
But most Canadian multiemployer plans — those with C$1 billion or less — historically have had minimal investment diversity, said Martin Leclair, principal at consulting firm Proteus Performance Management, Toronto. Mr. Leclair said a C$600 million multiemployer target benefit plan that signed on with Proteus two years ago had all of its assets in two balanced funds run by one money manager. The plan now has its 40% fixed-income allocation with suballocations to foreign fixed income, high yield and credit. The plan also has 10% allocations each to infrastructure and emerging markets equity, and 6% to real estate. He would not identify the pension fund.
Janet Rabovsky, Toronto-based principal at investment and benefits consulting firm Ellement, said multiemployer investing in alternatives “is coming along. ... They don't want to have to raise contributions or cut benefits, so they're building an asset mix with alternatives that allows them to do that, and not require equity risk premiums alone.”
The evolution of multiemployer plan investing began with a move away from a single money manager overseeing all plan assets, Mr. Leclair said. “I don't think anyone flicked a switch,” he said. “This market had been sourced directly by portfolio managers. They were acting as consultants as well. There were no asset/liability studies, no manager selection. Willis Towers Watson, Mercer, Aon Hewitt weren't in this space. But now it's starting. (Multiemployer plan executives) aren't stupid. They're open to changes. They've never worked with a consultant before.”
Proteus has gained C$2 billion in multiemployer assets under advisement in the past two years, bringing total multiemployer assets advised by Proteus to C$5 billion, Mr. Leclair said.
Ms. Rabovsky said asset growth is coming from changes in pension funding formulas that allow many Canadian multiemployer plans to smooth liabilities over 20 years, also known as funding on a going-concern basis, as opposed to accounting methods in which liabilities were based on short-term solvency. “With the risk spread out over a longer time horizon, multiemployer plans are better able to raise their funded status because they have more time to do it,” Ms. Rabovsky said.
While most multiemployer plans were slow to add alternatives until recently, Bruce Geddes, president at Phillips, Hager & North Investment Management, Vancouver, said those plans were ahead of the curve in Canada in their use of liability-driven strategies — and the success of LDI has led them to be more adventurous with their return-seeking portfolios.