Yesterday, UPP issued a press release stating it achieved a 10.2% annual rate of return and maintains healthy funded status in 2023:
Toronto,
ON – University Pension Plan Ontario (UPP) today released its 2023
Annual Report outlining performance and development from its second full
operational year. UPP ended the year with a 10.2% annual rate of
return, growing net assets to $11.7 billion. The Plan maintained a
healthy funding position, staying well-equipped to pay members’ pensions
today and over the long term.
"In another
challenging economic year, we're thrilled to see positive outcomes from
the operational and investment foundations we’ve built over the past
three years. In laying the groundwork for our comprehensive pension
services offering, and advancing our investment strategy, we’re
continuing to create long-term value for our members. With these strong
foundations in place, we're eager to keep growing, delivering value,
stability, and pension security to even more members of Ontario's
university sector.”
Barbara Zvan
President and Chief Executive Officer
“Our achievements this
past year highlight our progress in building a resilient plan aligned
with the needs of our over 40,000 members. We are pleased with our 2023
results and remain focused on ensuring long-term financial stability and
security. In implementing our long-term investment approach, we are
focused on providing the benefits of scale: efficiency, diversification,
transparency, and control in our portfolio. Looking ahead, UPP will
stay proactive in safeguarding our portfolio amid market fluctuations,
seizing unique opportunities, and maintaining a well-balanced approach
in line with our strategic vision and funding requirements.”
Aaron Bennett
Chief Investment Officer
2023 highlights
Held a 102% funded status with a $0.2 billion surplus1
Achieved a 10.2% annual rate of return
Increased net assets by $956 million to $11.7 billion
Committed
or invested over $820 million in private assets since 2022,
significantly increasing exposure to high-quality, long-term assets
Established a target to commit at least $1.2B in climate solutions by 2030 as part of a Climate Investment Transition Framework
Reduced UPP’s portfolio carbon footprint by 17% against a 2021 baseline, exceeding the 16.5% by 2025 target
Prepared
to deliver a full suite of pension services, with the planned launch of
an administrative system and member and employer service experience in
fall 2024
Provided pensioners, survivors, and dependents in pay
with an inflation protection increase of 3.54% to the post-conversion
portion of their pensions, effective January 1, 20242
1 On a smoothed asset basis 2 Pre-conversion inflation protection is based on the prior plan’s indexing formula, which varies by each plan joining UPP.
Additional information about UPP’s 2023 results, including financial statements, is available in the 2023 annual report and on our website.
About University Pension Plan Ontario (UPP)
University Pension Plan Ontario (UPP) is a jointly sponsored
defined benefit pension for Ontario’s university sector. UPP manages
CAD$11.7 billion in pension assets and proudly serves over 40,000
members across four universities and 14 sector organizations. UPP is
growing a resilient fund to secure pension benefits for members today
and for generations to come and is open to all employers and employees
within Ontario’s university community. For more information, please
visit myupp.ca.
Yesterday, I had a chance to catch up with UPP's CIO Aaron Bennett to go over their 2023 results.
I want to thank him for taking some time to talk to me and also than Zandra Alexander for setting up the call and sending me material ahead of time.
Before I get to our discussion, I think its worth reading their 2023 annual report here.
The annual report is very well written and comprehensive going over many facets of this organization:
I'm obviously not going to cover everything in this report which is why I recommend reading it including the section on responsible investing (around page 40) which they take very seriously.
I want to begin by going over Chair Gale Rubenstein's message:
Next, read the message from UPP's President and CEO Barb Zvan:
I note the following:
Shaping a purpose-driven fund
Since assuming full investment management of Plan assets in 2022, and with our Investment team firmly established, we have made significant strides to grow and align our investment portfolio to UPP’s long-term objectives. In the last two years, we have committed or invested over $820 million in private market assets, which help diversify our portfolio with inflation-protected assets. Our investment approach positions us well to withstand short-term challenges while continuing to create long-term value and bring increasing cost efficiency, transparency, and control to the portfolio—all key benefits that UPP was designed to provide.
Enduring value in a changing world
UPP’s efforts to protect long-term returns involve effectively managing risks and opportunities in our portfolio. Among other important material risks, climate change is an urgent challenge for which we have taken consistent action in line with our fiduciary duty. In 2023, we implemented new plans and frameworks to support our disciplined path to achieving net-zero greenhouse gas (GHG) emissions in our portfolio by 2040 or sooner, including a target to commit at least $1.2 billion in climate solutions by 2030. These initiatives — underpinned by member feedback — are all ways in which we seek to protect our investment returns against the impacts of a changing climate and pursue investment opportunities in the low-carbon transition that can enhance our ability to create value for our members.
Among my personal highlights and one of my greatest honours was to speak at the United Nations Climate Ambition Summit last fall about UPP’s net-zero commitments and how they help us deliver sustainable value to our members. My sincere hope is that even more policymakers and investors take meaningful action to ensure that the financial, social, and environmental systems we rely on are healthy, resilient, and sustainable.
Barbara
Zvan joined the University Pension Plan (UPP) as chief executive in
2020 when “literally, at this point, they had a plan text, and they
didn’t really have regulatory approval yet, and there was, I kid you
not, not a stapler to be found”.
“There was nothing,” she said.
“I had 24 great years at Ontario Teachers, apparently working with a bunch of legends
and lots of great colleagues. I was very comfortable with what $100
billion or $200 billion looks like. UPP is $12 billion – I’m missing a
zero. It’s a lot harder to manage $12 billion than $120 billion because
everything costs 10 times more when you look at it as an MER. So I
called 18 friends.
“I started saying, so what do you do? And
what do you have? What have you been able to do? I also called CEM
[Benchmarking]… and used some of the product data. And you saw a real
differentiation: after $10 billion they started doing some privates and
things.”
Zvan said early decisions included what
aspects of investment management should be internalised, what should be
external, and how should external managers be assessed.
“At the top of the house in terms of
research, knowing that I will have a complex portfolio of liabilities
and also from the study of talking to 18 peers, not a lot of that group
did asset liability work or risk analysis,” she said.
“We made an explicit investment to do that internally, ourselves.”
Zvan said that while she was at Ontario
Teachers, she oversaw the establishment of three different risk systems,
and given the volume of data the fund held, the last one took six
years.
At UPP she is “putting in Aladdin in a year”, she said.
“There are so many more tools that you can leverage today.”
Logical and progressive
Zvan said it was critical to build systems and processes in a logical and progressive way and not try to do everything at once.
“Have you ever watched a crab walk across a
beach? Look at the legs, they don’t all move at the same pace, but it
gets to a direction,” she said.
“So really when building UPP, that is the
balance between what do I need to build now, which controls first, what
depends on what we’re doing, and we’re taking that approach.”
Zvan said there were five principal
enablers in building UPP into an effective pension organisation from a
standing start. She said the first was staffing, and “making sure that
talent is incentivised, it’s innovative and it can come with ingenious
solutions, and there’s a good culture”.
The second was appropriate systems and
controls, so that if a university wanted to conduct due diligence on UPP
before committing staff pensions to it, “we wanted excellent marks”.
“They’re giving us their money, the members
are giving us the responsibility for their pensions, we want to make
sure we have the right controls,” Zvan said.
Zvan said UPP spent considerable time on
the third enabler, namely developing the right structure, including
governance. At the outset “not only there was no organisation, I can
tell you there was not even a delegation to management, there was not
one committee mandate, there was no board operating guidelines”.
“We had to build all that framework of how this board would work,” she said.
Compensation was also critical as the
fourth enabler, and Zvan said UPP wanted to ensure “we had the right
incentives in place”. She said the organisation hired around 200 people
and “for the vast majority of them, we had no incentive program yet”.
“I gave [them] a letter, some people can attest, [saying] there is a salary, this is your first bonus, trust me,” she said.
“That was that was the extent of it.”
And finally, UPP was able to leverage
technology as an enabler. Zvan said technology had advanced in leaps and
bounds since the early 90s.
“One reason why we could get up so much
quicker is, one, we had the playbook; but two, we leveraged technology
completely,” she said.
“We were in the middle of COVID, we did
cloud software as a serious service. We don’t code one line of code
today, we just move data around and we leverage and try to be good
buyers in that area.”
Keeping all this in mind, read the Q&A with Joanna Lohrenz, Chief Pension Services Officer:
And that brings me to the Q&A with CIO Aaron Bennett:
Discussion with UPP's CIO Aaron Bennett
This brings me to my discussion with UPP's CIO Aaron Bennett.
Aaron began by giving me an overview of last year and just to be clear, we focused mostly on investments:
2023 just like 2022 was interesting and the first couple of years of our life are certainly interesting years to start as a new investment organization but really a phenomenal test for our people and out strategies that we are trying to deploy.
You'll remember in 2022, we were in that transitional state where we were taking our portfolios that we had taken on from our predecessors and bringing all of those under one coherent prospect, a pension plan with aggregate liabilities.
This during an incredibly difficult macroeconomic environment where were we saw things we hadn't seen in a number of years.
So, the portfolio we exited with in 2023 is a lot closer in terms of asset mix of where we want to be, much more aligned with our strategies and our beliefs.
We are of course very happy with the result, 10.2% return but also recognizing we are a long-term investor so we are not going to rest on our laurels. Good indication we are on the right path but we are really focused on the long term, executing on our strategy and capitalizing on opportunities that are available to investors like us where we have the liquidity and capacity to go where the opportunities are.
I told Aaron that every pension plan/ fund I covered that had a higher allocation to public markets last year (CDPQ, HOOPP, IMCO, CAAT Pension Plan, Vestcor) did better than mega large pension funds that had a higher allocation to private markets.
That to me explains a lot of UPP's 2023 results, the asset mix which is tilted to public markets:
Aaron responded:
It's a really good observation. As it usually is, manager selection, security selection are important but asset allocation over the long term explain returns and I think you're dead on in terms of 2023. there was tons of positive beta across the market. If you had good exposure to broad public equities, broad fixed income, broad credit, you're going to do fine.
To answer your question on things we did last year. We allocated more to fixed income. We allocated more to specific opportunities in privates which maybe didn't drive a lot of performance but took out some of the volatility in public markets and put it where we see opportunities long term.
In equities, we got to a better balance in terms of regional allocation and better balance between active and passive. We really focused on streamlining the managers so to the extent we were aiming for active management, we were getting active management.
Fixed income was passive, throughout the year it was a bit of a tough year for fixed income and then at the last quarter, we saw a nice duration rally when investors got comfortable with the fact central banks were going to cut.
The final piece is what we refer to absolute returns strategies. Some call it hedge funds but we focus on absolute returns. For us absolute returns are absolute returns so we structured this portfolio with managers that provide us with uncorrelated alpha over the cash rate (T-bills). for us, we looked at cash plus premium out of these managers. They did well in 2022 and then again in 2023.
I told him Ron Mock, former CEO of OTPP who also ran the massive absolute return portfolio there taught me all about how beta is cheap and how real alpha is worth paying for (Ron sits on UPP's board now).
It's critically important to note T-Bills plus 500 bps or 300 bps aren't the same now that T-Bills are yielding above 4% as when they were yielding 0% during the pandemic (hurdle is much tougher now).
Aaron told me they're not doing portable alpha strategies yet with that portfolio but will look into it at some point.
"We really wanted to get in with right managers first and then looked into what we do at a portfolio construction level," he said
He also told me they set up their managed account platform in the absolute return strategies and they think that will allow them to do interesting things in addition to getting better transparency and control.
I asked him if that portfolio is up to 10% of Public Market assets and he told me that's their target allocation, they came close last year but didn't get there, focusing on having the right managers.
I then shifted my attention of inflation sensitive assets and asked him if they invested in real return bonds like Michael Wissell at HOOPP did last year.
Aaron told me he worked with Michael in the past at OTPP and owes much of his investment acumen to him. He said they have an inflation-linked bond allocation but unfortunately as they were starting the federal government stopped issuing them. They looked into currency hedged TIPS but decided not to go that route but will be looking to adding to these assets this year.
He also told me they see great opportunities in real estate and infrastructure:
We formulated this into a strategy saying want inflation hedge, we want inflation sensitivity here so very specifically we structured where we are going first on some of those things. You see it and we think that will set us up well for the long term. Quite frankly, in real estate and infrastructure, there aren't a lot of people allocating to mid-market opportunities so there are opportunities to strike great partnerships and find interesting opportunities.
I pressed him to give me some examples:
Real estate is a great example. There are niches in real estate which are actually pretty significant but they don't scale as readily or as quickly as some of the larger plans would need. If you look at the allocation at larger plans, tons of office, tons of retail because ability to scale and place a large chunk of assets is there. Multifamily/ own to rent, those are tough to scale so that's an area we looked at. We are looking at other interesting areas on the industrial size, more niche plays, whether it's refurbishing warehouses or even things like storage.One area that interests us although we haven't found the right partner is student housing. That's something that's relatively small in scale. Some of the larger players have invested there but they haven't scaled up.
Infrastructure is another one. Everyone sees the big power projects. Everyone sees the huge pipelines and the rest of that stuff. We've been able to connect with a manager that is doing a lot of the things that enable the energy transition and it's stuff people pay in an inflation indexed way. And that's things like grid stability, sourcing and developing data centres and all the water and energy associated with those.
These are "nichier" investments that really are mid-market and you can't deploy hundreds of millions or a fund that has $10 billion plus in infrastructure cannot really deploy in these areas until they've been scaled up. So investing in the players that are enabling as well as scaling up to the point where some of the larger players can buy it in the size that they like to help us.
That's been really helpful in real estate and infrastructure.
In private equity, he told me it's early days on that:
As you recall, we did our took on a large book in private equities as well as private credit. We were really well allocated there so we wanted to understand what are managers are doing and where the opportunities lie there.
We actually did our first private equity transaction in 2024 and again it was focusing on mid-market with folks that have a platform of assets that can either be rolled up into a larger amenity and bought by a larger fund over time.
We talked about their first co-investment in in Angel Trains and how they helped expand its infrastructure program through partnership with Arjun Infrastructure Partners (see my coverage here).
Aaron told me it's an asset they know well and that Peter Martin Larsen, Head of Private Markets, used to sit on the board of Angel Trains.
We then talked about how UPP is expanding its membership. I note that as of April 30, 2024, the Association of Professors of the University of
Ottawa (APUO) and the Ontario Confederation of University Faculty
Associations (OCUFA) have officially joined UPP.
He said they intentionally slowed uptake of new members this year to digest the portfolio but two more members will joining the plan in January 2025 and after that, a more regular cadence.
But he correctly added:
All that being said, this is a really important and complex discussion. These things take time. these are pensions. They're complex and they matter a lot to people and it's really important that people come together and do what a jointly sponsored pension plan is meant to do, bring people together and have them share risk and governance.
As you can imagine, when you're talking about employers and employees, that's a complex conversation and one that in the past has been part of collective bargaining. So, to advance that and bring people together to see the value proposition we created, that's really great. That's the intent, we are for the sector, by the sector and the intent is to be a sector plan.
He told me as an organization they are growing a lot and developing the mindset on how to make this transition easier:
How do we solve some of these problems for folks coming in? How do we work with our joint sponsors who also have oversight into new entrants over the plan?
That means having in-house portfolio construction, investment risk, asset-liability. All of that is required to answer complex questions. I don't have to go to an external provider to do that. We've got folks that can do the asset-liability internally and get those answers quickly in the context of what it means to be part of UPP.
We then talked about the current macro environment and what his views on where rates and inflation are headed and I asked him specifically if they're preparing for a more difficult road ahead:
I think so, predicting the future is difficult so we try to build resilience. My general view is rates are going to moderate. Are they going back to zero? I'm not sure. It doesn't seem likely and that has al sorts of implications across the portfolio and managers.
As far as inflation, it has moderated and moderated quickly and that's great. I think our central bank has done a decent job getting us to this point. I'm not sure 2% is a target, floor or an average and that's meaningful because if you're talking about periods of 3% inflation or high volatility around inflation and therefore high volatility around expectations, that can have significant implications to your overall asset mix depending on how you think about those.
We are really trying to prepare that portfolio to be resilient through a variety of potential outcomes and make sure we have the tools and liquidity so when those opportunities present themselves, we can dive right in.
Now I understand how Michael Wissell influenced his investment acumen as Michael has a maniacal focus on liquidity.
I also told him another OTPP alum, James Davis, CIO of OPTrust, told me he's more worried about a period of stagflation as that is a tough environment for pensions.
Stagflation and deflation are very difficult environments for pensions with the latter being a perfect storm (rates will go back down to zero and asset values will get clobbered).
Are we headed back to the 1970s or 1929? Hopefully not.
Aaron ended it off on this note:
The one thing I'd really like to add is I'm incredibly proud of the team and what we've been able to build in such a short period of time and the success we had early on.
One important measure of success -- and you know this -- is integrating responsible investing and climate action as something that is important to meet our fiduciary duty.
We've made big commitments and everyone is saying, great but how are you progressing against them?
First, you're seeing in the annual report a real integration. Second, we've already shown really great progress in terms of investing in climate solutions. We're already a third into that and we are so early in life and literally just set up a team and built the engine to do this. And finally in terms of carbon reduction targets, we've made significant reductions there all while trying to navigate the environment, all while trying to transition the portfolio.
So, really proud of the team and happy about what we've accomplished, certainly with Barb's support as well as trustees and Brian Minns and his team on the RI side.
These are things we are really privileged to have access to and it's showing in the results.
I told him Brian Minns and his RI team are great but added that I have nothing against responsible investing as long as it's an added value to the investment process and bolsters long-term results.
Aaron agreed: "If it doesn't support our fiduciary duties to fund the pensions of our members, than that's something we should be thinking very differently about."
Alright, it's a long note, couldn't finish in time yesterday as the baby pension chief comes first but wanted to than Aaron once again for a very insightful; discussion.
A few last tidbits. You may have noticed that UPP doesn't report its benchmark performance and that's because it hasn't achieved its target allocation yet:
And in terms of executive compensation, the organization is very transparent:
I find this to be on the low side relative to larger peers but keep in mind, it's still a young organization in ramp-up phase and their compensation is more flat than other places so they can attract talent.
Alright, that's a wrap!
Below, Barbara Zvan, president and chief executive officer at UPP, joins BNN Bloomberg to talk about the importance of having a net zero 2040
commitment. Zvan also discusses why private equity, debt and
infrastructure investments in Canada are some of the top holdings in
UPP's portfolio.
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