HOOPP Gains 11.3% in 2021, Achieves 120% Funded Status
The Healthcare of Ontario Pension Plan (HOOPP) announced today that it delivered an 11.28% return in 2021, bringing its net assets to $114.4 billion, up from $104.0 billion at the end of 2020. The Plan’s funded status is 120%, meaning that for every dollar owed in pensions it has $1.20 in assets.
HOOPP has a 10-year annualized rate of return of 11.06% (as of Dec. 31, 2021). According to the most recent report (2020) from consultant CEM Benchmarking, based on a global dataset of 218 pension funds, HOOPP’s 10-year net returns were in the top 10% and its 10-year net value-added was the second highest. HOOPP’s value-add return for 2021 was 2.69%, among the highest in the Plan’s history.
“HOOPP’s in-house investment team successfully navigated another year of challenges in the economy related to the ongoing effects of the pandemic,” said President & CEO Jeff Wendling. “The result is a strong return and funded status that help make the Plan secure for the long-term benefit of the healthcare workers of Ontario.”
HOOPP delivered strong returns across many asset classes, including public equities, real estate and private equity, which offset modest declines in its bond portfolio. At the same time, HOOPP continued to evolve its investment strategies with more investment in infrastructure and the innovation economy.
HOOPP also built upon and expanded its long-standing commitment to sustainable investing. The Plan has committed to achieving net zero carbon emissions in its portfolio by 2050. In addition, in 2021, HOOPP:
- introduced a $1 billion allocation to climate change equities
- was a founding member of Climate Engagement Canada, a collaborative engagement initiative focused on driving action at Canadian companies to deliver emissions reductions
These are just a few steps in an ongoing multi-year approach to sustainable investing.
Wendling added: “HOOPP will continue to purposefully and thoughtfully diversify our portfolio through allocations to a wide array of strategies, including building on our successes in private markets. Our strong performance record puts us in a good position to seek opportunities that will safeguard our members’ pensions, now and into the future.”
Other highlights:
- Member benefits: HOOPP’s Board of Trustees granted a benefit improvement in 2021 to increase lifetime benefits for active members. In addition, a full cost of living adjustment was granted in 2021 and again in 2022, to help retired members keep up with the cost of inflation.
- Low operating costs: HOOPP continued to provide a high level of service to members while operating efficiently. Operating costs for the year represented just 0.32% of assets, which helps keep contribution rates low and affordable for members and employers.
About the Healthcare of Ontario Pension Plan
HOOPP serves Ontario’s hospital and community-based healthcare sector, with more than 620 participating employers. Its membership includes nurses, medical technicians, food services staff, housekeeping staff, and many others who provide valued healthcare services. In total, HOOPP has about 420,000 active, deferred and retired members.
HOOPP operates as a private independent trust, and is governed by a Board of Trustees with a sole fiduciary duty to deliver the pension promise. The Board is jointly governed by the Ontario Hospital Association (OHA) and four unions: the Ontario Nurses’ Association (ONA), the Canadian Union of Public Employees (CUPE), the Ontario Public Service Employees' Union (OPSEU), and the Service Employees International Union (SEIU). This governance model provides representation from both management and workers in support of the long-term interests of the Plan.
Here are some of HOOPP's 2021 highlights:
Also, please take the time to read HOOPP's 2021 Annual Report which is available here.
One chart worth bringing to your attention is on page 23 showing growth in assets and liabilities over the last 20 years:
HOOPP explains its approach to managing assets and liabilities:
Our primary approach to managing funding risk is through a liability-driven investing (LDI) strategy, where our Plan’s liabilities are closely considered when investing Fund assets. This approach focuses on ensuring that the growth of our investment portfolio meets or exceeds the growth in our pension obligation to members. This differs from more traditional investment approaches that primarily focus on asset growth beating asset-based benchmarks.
LDI at HOOPP involves allocating our Fund’s assets between the two broad portfolios: the liability hedge portfolio and the return seeking portfolio.
The liability hedge portfolio is designed to offset most of the risks associated with inflation and interest rates, which are the major risks that can increase the pension benefits paid to members. It contains investment assets that perform in a manner similar to those of the Plan’s liabilities.
The return seeking portfolio is designed for controlled risk-taking in investment assets and strategies to generate incremental returns to the Fund to help ensure the Plan remains affordable, while providing diversification benefits for the entire portfolio.
More detail on the performance of these portfolios can be found later in this section, starting on page 28.
Even though HOOPP's approach isn't to beat some benchmark, but to meet and exceed the growth in its liabilities, it still delivered great value-added in 2021 (269 basis points) and over the long run:
I'm not sure if this is record added-value for HOOPP but it's definitely up there.
Alright, earlier today, I had a chance to talk to HOOPP's President and CEO Jeff Wendling to go over these results.
I'd like to thank him for taking some time to talk to me and also thank James Geuzebroek and Jackie Emick for sending me material, setting up this Teams meeting and attending it.
Jeff began by going over the important highlights:
- 11.3% annual return which keeps the 10-year return over 11%, "so very solid long-term returns"
- Net investment income of $11.6 billion and growth in net assets to $114.4 billion from $104 billion in 2020
- "But I would say the most important metric we focus on is the funded status which is 120% and that's what it is all about for us, generating returns to maintain that strong funded status. As Jim Keoheane would often say, we are a pension delivery organization."
- He added: "Our funded status is also important to weather some of the challenges we may face and we have ample liquidity to take advantage of opportunities as they arise."
On the funded status, Jeff told me the discount rate remains 4.65% nominal and 2.65% real (see page 22 of annual report for details).
We then talked a bit about HOOPP's massive bond portfolio:
"In the last two years, we have been net sellers of bonds. We still have a sizable bond portfolio but it has come down. In terms of where we have been selling, it's pretty much across the curve but mostly long-term and mid-term bonds as well."
I asked him if they have any views on "inflation stickiness" or are agnostic:
"It's interesting, obviously we have hot inflation numbers right now and with the war in Ukraine, it has only spiked further. But I do recall over the last 20 or 15 years, we had a disinflationary environment and we had challenges meeting that 2% inflation target from central banks. So, I don't know, massive fiscal and monetary stimulus, supply chain woes and the war caused inflation to spike but I think some of those factors that caused disinflation will reassert themselves so we will get higher inflation than the past (north of 2%) but I don't see it at 4-5% annualized for long. However, we have made some adjustments to our portfolio by selling nominal bonds, still have a very large real return bond portfolio, we are investing in real estate which has an inflation hedge embedded (leases are indexed to inflation) and we created an infrastructure program in 2019 and that's moving along nicely, about $2.5 billion in assets now which will grow nicely over the next 5 to 7 years as opportunities arise."
Now, given that infrastructure is a fairly new asset class at HOOPP, I asked Jeff how will they navigate scaling into these assets given current market conditions where valuations are on the high end:
"It's a challenge but you can say the same about any asset, like public and private equities, credit, and real estate where they are at all time highs. Almost anything you look at is richly valued. In infrastructure, we have some key partners we are working with, key fund relationships and we are a large investor with a long investment horizon, so if there is volatility, that's an opportunity for us. So, we are taking the long view, it will take us a number of years to get the capital out, we will invest and co-invest with our partners to get to the target allocation but we are patient and will invest as opportunities arise."
Partnerships are critical to infrastructure right now but Jeff said direct investments are possible in the future, just like they did in private equity:
"If you look at Private Equity, we have roughly 65% of assets managed through funds but the balance is co-investments where we have a great team which can underwrite the deals. We also have some purely directs as well. So that's what we will likely do in Infrastructure as well but right now, it's co-investments."
In Real Estate, roughly 60% of the assets are in Canada but they are looking to diversify more outside the country:
"Real estate is part of our LDI portfolio and at one point it was 95% Canada but we have taken it down considerably to under 60% and will take it down more. Generally in Canada, we are direct investors in real estate (some small niche funds) and in the US and Europe we mostly co-invest with our partners but do some directs as well. And we are developers too, our office in Toronto (One York) was developed."
On Real Estate, he added:
"If you look at our portfolio, we were early in industrials, we are one of the biggest logistics landlords in the GTA. We have the second largest industrial park in the UK and have other industrial assets in western Europe as well. We are looking to do more multi-family in the US right now. As an interim goal, we are looking to bring our Canadian exposure in real estate to 50%. "
Jeff mentioned they have a new head of Real Estate, Eric Plesman, who used to work at Oxford Properties and they recently hired Lori Hall-Kimm as head of global Private Equity so they will also have an important say on strategy (they report to Mike Wissell, HOOPP's CIO).
I then mentioned a Bloomberg article I read today where US office buildings face $1.1 trillion obsolescence hurdle:
One of the tallest office towers in St. Louis lost 96% of its appraised value. Denver’s former World Trade Center complex faces foreclosure. An oil company’s vacant Houston workplace sold this year at a $67.4 million loss to lenders.
Those properties are among the 30% of U.S. office buildings -- worth an estimated $1.1 trillion -- that are at high risk of becoming obsolete as tenants’ tastes change in the hybrid-work era, according to Randall Zisler, an independent consultant and former head of real estate research at Goldman Sachs Group Inc.
Some companies are scaling back their space. Others are gravitating to newly developed or recently overhauled offices that are environmentally friendly, with plenty of fresh air and natural light, fitness rooms and food courts. Left behind are older buildings that would be expensive to renovate to today’s standards. As values for those properties slide, some landlords are walking away.
“We’re not saying bulldozers are arriving en masse,” Zisler said. “But you’re going to see a repricing and, in some cases, reuse of these buildings.”
You can read the rest of the article here but the point I made to Jeff is you'd better have the right assets in real estate or else you won't attract the right long-term tenants.
Jeff commented:
"If you look at our three biggest holdings in office real estate, the building we are in right now, it was the most efficient LEED certified building in Canada when it was built. We have another great building down the street and another energy efficient building in London. We have good product and environmentally high quality product as well."
That brought me to another important point, HOOPP was voted as one of the most responsible asset allocators last year, so they are obviously doing their sustainable investing right.
Jeff told me the Plan has committed to achieving net zero carbon emissions in its portfolio by 2050. He said they have been doing sustainable investing for a long time, engaging with companies in public markets over many years and now it's across private markets as well. He mentioned their real estate team are "leaders in this space".
He also mentioned a couple of new initiatives:
- introduced a $1 billion allocation to climate change equities
- was a founding member of Climate Engagement Canada, a collaborative engagement initiative focused on driving action at Canadian companies to deliver emissions reductions
But, to be clear, HOOPP doesn't believe in blanket divestment, it still has some oil & gas investments (small percentage) and they prefer engaging with these companies rather than passing the risk off to some other fund which doesn't take sustainable investing seriously.
Lastly, I asked him about future challenges and he replied:
"We pride ourselves in our liquidity management and we want to be buyers instead of sellers when a crisis arises. We are in strong funded position and are always looking for opportunities. As I stated, we have new heads of real estate and private equity and are ramping up our infrastructure portfolio as opportunities arise. We have also allocated more to external hedge funds in a selective way as we still manage a lot of strategies internally and we are not paying up for beta."
As for Russia, they had extremely negligible exposure through their emerging markets exposure which they get through futures but that's gone now.
As far as foreign offices, they are looking into to but are not there yet and there’s “nothing imminent” for now.
Let me once again thank Jeff Wendling for a highly stimulating conversation, I really enjoy talking to him even if it's once a year.
You can read more articles going over HOOPP’s 2021 results here and here.
Below, Jeff Wendling, president and CEO of HOOPP, joins BNN Bloomberg to discuss their 2021 annual results. The pension plan reported an 11.28 per cent return on investments for 2021 and grew net assets to $114.4 billion, up from $104.0 billion at the end of 2020.
Watch it here if it doesn't load below. I'm happy that Ontario's healthcare workers have a great pension plan run by top-notch professionals, they deserve it!
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