Smaller to midsize public and corporate defined benefit plans in Canada are considering pooling their assets to access alternative investment options that might otherwise prove too costly for the pension funds to go it alone, sources say.
One of the main drivers for the plans is to diversify their portfolios away from volatile equity markets as well as bonds, where yields have declined alongside interest rates.
Greg Heise, a Vancouver-based partner at George & Bell Consulting Inc., a pension, benefits and investment consulting firm, said pension plans are teaming up, often in an informal manner, as a means of sharing money manager due diligence and search costs.
He has seen plans in British Columbia, Alberta and parts of northern Canada seek out these arrangements, with a focus on targeting private infrastructure investments, although DB plans have also sought out private real estate, private debt and private equity deals, he added.
"I would say volatility (in the stock market) is a big reason," Mr. Heise said of pension plans' measures to invest in alternatives. "The volatility is often something that these plans can't withstand."
The C$6 billion ($4.5 billion) Saskatchewan Teachers' Retirement Plan, Saskatoon, is considering working with one or two other public-sector pension plans in the province to more efficiently access alternatives, said Troy Milnthorp, senior managing director, corporate fund services, at the Saskatchewan Teachers' Federation.
The Saskatchewan Teachers' Federation acts as the trustee and plan administrator for the teachers' pension plan.
"Between the three of us we might have around the C$25 billion mark (in plan assets), which opens up different economies of scale for us," Mr. Milnthorp said on Sept. 11 while attending the national conference for the Association of Canadian Pension Management held in Vancouver.
The teachers' pension plan is weighing investment via co-sourced infrastructure deals with managers, which are looking to raise funds from pension plans and other outside investors, he explained.
The expectation is that pooling money with other plans would reduce due diligence costs associated with vetting managers, but also provide leverage to negotiate fees, Mr. Milnthorp said.
The teachers' pension plan has about C$330 million invested in infrastructure. The plan's potential partners have between C$100 million and C$400 million invested in infrastructure, he said.
Bradley Bondy, a Vancouver-based partner at Ellement Consulting Group, an actuarial and investment consulting firm, said that when the company serves as a consultant for multiple investor clients buying the same alternatives fund, some managers lower their fee.
"The motivation really, I think, is to get fees down. The larger the investment, typically, the lower the fees. (The needed) governance resources are fairly high for some of the funds, especially closed-end funds," Mr. Bondy said.
