CAAT Pension Plan Returns 9.5% in 2023

Benefits Canada reports CAAT returns 9.5% for 2023, led by global, emerging market equities:

The Colleges of Applied Arts and Technology pension plan saw a net return of 9.5 per cent for 2023, with net assets of $20.1 billion, up from $18.2 billion in 2022, according to its latest annual report.

As of Jan. 1, 2024, the investment organization maintained a healthy funding level of 124 per cent on a going-concern basis — with $1.24 set aside for every dollar promised in pensions — increasing its funding reserves to $5.3 billion.

The plan saw positive returns in global equities (19.8 per cent), emerging markets equity (19 per cent), nominal bonds (7.4 per cent) and private equity (5.9 per cent). However, commodities recorded a loss (negative 6.6 per cent) during the year. In 2023, Canadian holdings made up nearly 30 per cent of the plan’s assets, including investments in equities, bonds, real estate and infrastructure.

In a press release, Derek Dobson, the CAAT’s chief executive officer, said the plan has seen a well-funded status for more than a decade. “Reserves protect the plan against any unexpected headwinds, which reinforces benefit security.”

A few weeks ago, CAAT Pension Plan announced strong growth results for 2023:

The Plan continues to see growth in assets, employers, members and investment returns

TORONTO, April 18, 2024 — CAAT Pension Plan ("the Plan"), one of Canada's fastest-growing modern pension plans, is pleased to release its 2023 Annual Report and digital Year in Review, which illustrates the Plan's strength, continued growth and commitment to improving retirement income security for more Canadians.

The Plan welcomed more than 80 new participating employers and 11,000 new members in 2023 – for a total of over 370 employers and more than 94,500 members. New participating employers, including Canadian Nuclear Laboratories, Lakehead University, and Thunder Bay Pulp and Paper, among many others, are now offering the security of a CAAT pension to their employees.

Investment strategy continues to show strong returns over the long term

CAAT’s investment strategy is designed to generate sufficient long-term returns to keep benefits secure and grant conditional enhancements with a level of risk that is appropriate. As of January 1, 2024, the Plan’s funded ratio is 124% on a going-concern basis. Plan assets are $20.1 billion and the Plan has $5.3 billion of funding reserves.

The Plan is also pleased to report a 10-year annualized net rate of return of 9.3%, significantly outperforming its policy benchmark. The Plan’s net investment return in 2023 was 9.5%.

"We are committed to fulfilling our pension promise to members and providing a sense of security that comes with lifetime retirement income. The strong results of our investment, growth and funding strategies reinforce the Plan's benefit security and long-term sustainability,” said Derek W. Dobson, CEO and Plan Manager, CAAT Pension Plan. “Pensions are about trust. Our employers and members place a high degree of trust in the CAAT Plan, which motivates us to continue innovating and improving retirement income security options for Canadians."

CAAT members and participating employers trust the Plan

CAAT Pension Plan aims to provide its members with secure and stable lifetime retirement income. In the 2023 Annual Member and Employer Survey, nine out of ten member respondents said they trust the Plan and believe that the Plan is fulfilling its mission to provide Canadians with secure, valuable, and sustainable pensions. Nearly 100% of participating employer respondents said they also trust the Plan.

Over the last year, members, employers and industry experts continued to join CAAT’s plan ambassador program to help spread the word that secure lifetime retirement income is important for Canada and “Pensions are for Everyone.”

The Plan’s digital Year in Review is available here, and the Annual Report is here. CAAT will host its annual Pensions for Everyone 2024 Conference on May 2, 2024. Register and learn more here.

About CAAT Pension Plan

Established in 1967, the CAAT Pension Plan is an independent, jointly governed plan that offers two highly desirable designs of a defined benefit pension. CAAT’s award-winning DBplus plan design is leading an extraordinary pace of growth for the Plan. Originally created to support the Ontario college system, the CAAT Plan now proudly serves more than 370 participating employers in 20 industries including the for-profit, non-profit, and broader public sectors. It currently has more than 94,500 active and retired members. The CAAT Plan is respected for its pension and investment management expertise and focus on stability and benefit security. On January 1, 2024, the Plan was 124% funded on a going-concern basis.

And in late March, the Plan announced strong funding status and assets under management:

The Plan saw significant growth in membership and participating employers across Canada in 2023

Toronto, March 28, 2024 – CAAT Pension Plan ("the Plan"), one of Canada's fastest-growing defined benefit (DB) pension plans, is pleased to announce its strong funded position of 124% as of January 1, 2024, on a going-concern basis, with a funding reserve of $5.3 billion.

In 2023, the Plan saw significant growth, welcoming nearly 80 new employers and over 11,000 new members. CAAT now supports more than 370 participating employers (up 27% from 2022) in 20 different sectors, and over 94,500 members. CAAT closed the 2023 fiscal year with a market value of assets of $20.1 billion.

"We continue to work hard to ensure we can provide secure pensions to our members while we look for opportunities to expand retirement income security to more Canadians," said Derek W. Dobson, CEO and Plan Manager, CAAT Pension Plan. "Our prudent financial management and robust investment strategy have resulted in a significant increase in the value of our assets and reserve fund, further strengthening our pension promise."

CAAT's successful management and investment strategy allows the Plan to continue to offer its conditional inflation protection enhancements to at least 2027, in accordance with the Plan's Funding Policy. CAAT has granted conditional inflation protection enhancements since its introduction in 2007.

A profit-for-members model delivering more value

Sound investment decisions and prudent funding management allow CAAT to implement changes to its modern DB plan designs, DBprime and DBplus. As announced last year, effective January 1, 2025, participating members and employers under DBprime will receive a decrease in contribution rates, while DBplus members will receive an increase in the annual pension factor on future contributions. As a result, DBprime members will build the same valuable pension with lower contribution rates, and DBplus members will grow their pension faster while contribution rates remain the same.

The Plan’s 2023 investment results will be released with its annual report on April 15, 2024.

A couple of weeks ago, I had a chance to talk with CIO Asif Haque and Chief Pension Officer Evan Howard to go over results and more.

I want to thank both of them for taking some time to chat and also thank Greg Hubert for setting up call.

The reason I waited so long to post something on CAAT's results is that CAAT has an annual meeting with members and I wanted to add a clip below from it.

Now, before I get to my interview with Asif and Evan, please read CAAT's 2023 Annual Report here.

The report is very well written discussing funded status, strategic priorities, investments and a lot more.

Below, the message from CEO and Plan Manager Derek Dobson:

The most important points are these:

The Plan has been well-funded for more than a decade and continues to be one of Canada’s highest performing and most sustainable pension plans. Results of the actuarial valuation ending January 1, 2024, confirm that the Plan remains at a healthy funding level of 124% on a going-concern basis, with $1.24 set aside for every dollar promised in pensions. Surpassing $20.1 billion in market value of assets, our trusted team of experts have built $5.3 billion in funding reserves. Reserves protect the Plan against any unexpected headwinds which reinforces benefit security.

Our mission to provide secure, valuable, and sustainable workplace retirement solutions requires meeting the demands of a changing business environment and intensely competitive labour market. As pension partners, CAAT worked with diverse employers such as Nova Scotia Department of Education and Early Childhood Development, Candu Energy, and Canadian Nuclear Laboratories to support their talent attraction goals with lifetime retirement income and the peace of mind that it brings.

I'm glad to see CAAT has welcomed new members and is growing nicely.

The critical part, however, is the funded status which remains at a maximum level of 124% and that they built in $5.3 billion in reserves to guard against unexpected headwinds.

Keep in mind, CAAT's asset mix is still tilted in public markets:

As shown above, private assets (PE, RE and Infra) represent 40% of the total asset mix and the rest is in public equities, fixed income and commodities.

Not surprisingly, CAAT's performance was strong last year despite lagging its policy benchmark:

 

Worth keeping in mind that even though CAAT Pension Plan lagged its policy benchmark by 320 basis points last year, it still delivered a nominal rate of return of 9.5%.

More importantly, over the last 5 and 10 years, the Plan has outperformed its policy benchmark by 1.7% and 2% respectively and that's what ultimately counts, long-term performance.

And if you look at returns by asset class, global developed equity and emerging markets equities led last year which is in line with what I observed in other funds/ plans and performance in private equity and real assets was decent but more muted:

 

I also like that CAAT outlines its benchmark for each asset class very clearly.

Discussion With Asif Haque and Evan Howard

As I stated above, I did have a chance to talk with CIO Asif Haque and Chief Pension Officer Evan Howard to go over results and more.

I began by observing that pension funds that had an asset mix titled more to public markets performed better last year so I wasn't surprised CAAT delivered strong returns.

Asif responded:

With a one-year perspective, we posted 9.5%, happy with that. To your point, our public markets were strong with global equities leading the way with a 20% gain. Our Real Assets portfolio returned 6% last year and our Private Equity didn't keep up with public equities but with these asset classes, you're really much more concerned about a longer-term perspective. 

Over the last 10- years, the Plan return is 9.3%, 2% ahead of policy benchmark and most importantly, ahead of what we need to keep the Plan secure and maintain benefit security. Both our public and private market portfolios have been strong over that 10-year period and that's what is most important to us.

Asif did mention that they underperformed benchmark last year and that's "entirely a function of private equity not keeping up with public equities" but again stressed the importance of maintaining the focus on long-term results which are excellent.

I agreed with him and said even this year, if inflation expectations remain high and rates stay elevated, it can negatively impact public and private markets so it's best to focus on long-term results.

In terms of asset mix, Asif told me the long-term target weight for private equity is 15% and the long-term target weight for real assets is 23%, almost equally split among real estate and infrastructure (a tad more titled toward infrastructure).

In real estate, he told me they are happy with the long-term performance relative to benchmark set for that asset class and have more exposure to industrial and residential than retail and office.

I noted that in private markets, CAAT has ramped up its co-investments and Asif replied:

Yes, it's going very well, we have meaningful co-investments across private equity, real estate and infrastructure.

He didn't provide exact details on the split between fund investments and co-investments but it's clear that co-investments are a meaningful part of attaining long-term performance in private markets.

I told him I'm worried about inflation persisting this year and asked his thoughts:

We worry about all these things, we think about impacts of inflation, we think about impact of rates staying higher for longer, we think about geopolitical issues that are out there, but again, we really do have a long-term focus and we are starting from a good place. The Plan is 124% funded, we have over $5 billion in funded reserves. So we are starting from a good place and while we are concerned about these issues and think about them, we maintain a long-term focus and continue to invest with a longer horizon.

I think it's really important to note the starting point here because on any given year, any pension get get clobbered if markets head south but if you start with a built-in reserve, you can withstand that blow and still deliver secure benefits.

I asked Asif what he sees going on in private equity and if they are big in private debt:

As for the asset-liability study we conducted back in 2022, one f the outcomes of that was establishing a separate credit allocation for the first time at the policy asset mix level. That was a combination of both public and private credit. At target, that will be 8% of our overall asset mix once we build it up and we are still in that build phase.

We've been adding private credit over the last two years. I've been looking at private credit opportunities the team has put in front of us just recently. We are still building that out and we think it's going to be an important part of the asset mix gong forward.

Again, this build out in Credit is with strategic partners and there will be some co-investments there too.

In terms of private equity, I noted that I don't see a lot of activity as if people are waiting for something. 

Asif responded:

The team is still seeing opportunities. we are very selective in the types of things we work on both on the funds side and co-investments side.

Also worth noting that CAAT can and does focus more in mid-market space in private equity where there are still ample opportunities and spreads are decent (not fantastic, decent).

I ended with a brief chat with Evan Howard, the Plan's Chief Pension Officer and asked him about the growth in membership.

Evan replied:

We continue to grow and expand pension coverage to more Canadians. Over the past year, we added over 80 new participating employers to the Plan and that's across 20 industries which include for profit, non-profits and broader public sector. In terms of membership numbers, that amounts to 11,000 new members over the last year. We continue to grow, that growth makes the Plan stronger allowing us to deliver more secure pensions to more Canadians.

I noted that as rates back up, most corporate plans are de-risking their DB pensions and passing the risk off to insurance companies which annuitize them.

Evan responded:

Most of the growth is not coming from these companies but rather ones that are replacing a group RRSP or some sort of savings plan. A lot of that growth comes from word of mouth. The more we grow, the more word gets out there, the more employers see how we can deliver with this type of Plan in terms of the coverage that it can provide to their employees, allows them to get better value for the benefit dollar they're spending for their employees.

The value proposition is definitely there and I'm happy to see CAAT Pension Plan is helping Alberta employers attract and retain top talent and helping others as well.

Alright, let me end it there and once again thank Asif, Evan and Greg for speaking with me.

Below, CAAT Pension Plan’s CEO and Plan Manager, Derek W. Dobson, is a seasoned leader in the pension industry. In a live Q&A format, Derek shares how CAAT continues to prioritize member and employer needs and he announces the release of the Plan’s latest innovation. Attend the closing segment to gain insights into value of CAAT Pension Plan and what the future of retirement income security looks like for Canadians.