The Healthcare of Ontario Pension Plan (HOOPP) is reporting returns of 13.68% and net assets of $35.7 billion in its 2010 Annual Report, released today.You can download HOOPP's 2010 Annual Report by clicking here. I contacted Martin who put me in touch with Jim Keohane, HOOPP's CIO. Jim called me late this afternoon and was kind enough to go over a few points with me.
"HOOPP continues to be fully funded, providing security and peace of mind for HOOPP members and pensioners," says HOOPP President & CEO John Crocker. Thanks to that healthy funded status, contribution rates for members and employers have not changed since 2004, and will remain the same until at least the end of 2012, says Crocker.
On the investment side, "equities and long-term bonds were our strongest performers in 2010," he says. HOOPP reported returns of 17.38% in Canadian equities and 16.78% in U.S. equities. Canadian long bonds were up by 17.35%, real return bonds were up 11.41%, universe bonds were up 9.54% and corporate credit was up 1.71%. HOOPP’s real estate portfolio had a solid year as well, returning 12.29%. Private equity posted a 9.7% return rate (approximately 16% before foreign exchange impacts).
"2010 was a special year for HOOPP," says Crocker. "We celebrated our 50th anniversary, and rebranded ourselves as the Healthcare of Ontario Pension Plan, a name which is more inclusive of our membership. We were also named one of Canada’s Top 10 Most Admired Corporate Cultures. These excellent results, and the fact that we’re fully funded, put an exclamation mark on a tremendous year – and speak to the dedication and professionalism of the HOOPP team."
The annual report, titled We are HOOPP, is posted on HOOPP’s website, hoopp.com. Here is a link to the annual report: www.hoopp.com/annualreport.
About the Healtcare of Ontario Pension Plan
Created in 1960, the Healthcare of Ontario Pension Plan (HOOPP) is the pension plan of choice for Ontario's hospital and community-based healthcare sector with over 340 participating employers and more than 250,000 plan members and retirees. HOOPP invests the assets of its $31 billion Fund, administers the Plan and pays more than $1 billion per year in pension benefits. The HOOPP defined benefit plan is a formula based benefit that provides security and peace of mind to Ontario's healthcare workforce.
HOOPP was named one of Canada's 10 Most Admired Corporate Cultures in 2010.
HOOPP is governed by a Board of Trustees with representation from 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). The unique governance model provides representation from both employers and unions in support of the long-term interests of the Plan.
For further information or to arrange interviews, please contact:
Director, Public Affairs
But let me first go over some highlights from the annual report starting with John Crocker, President & CEO at HOOPP. Below, I copy Mr. Crocker's message (added emphasis is mine):
2010 was a major milestone for HOOPP – not only did we celebrate 50 years of serving our members, but we also better reflected our expanding member base by changing the “H” in our name to the Healthcare of Ontario Pension Plan.I really like the way Mr. Crocker emphasized the importance of "culture" in his message. As I stated in my last comment on apples and oranges, culture is the single most important thing in any organization and yet few leaders take the time to address it. Not HOOPP, they take their culture very seriously and that's why their culture of excellence was recognized this year as one of Canada’s Top 10 Most Admired Corporate Cultures. Keep in mind, employees answer this survey, so you know it's not just fluffy, bogus PR going on here.
As the pension provider to the healthcare community, it is clear that, while profound changes have taken place, our commitment to ensuring all healthcare workers enjoy a financially secure retirement remains the same.
Once a member starts their pension, it continues for life.
Having led the Plan for the past 10 years, I am more convinced than ever that defined benefit plans like HOOPP are an overlooked, but essential component of private sector retirement income. With a DB plan, a member can rest assured that an investment expert is helping to lay the foundation towards a financially secure future. And shouldering that investment risk is something that we have always taken seriously.
We maintain our credibility with industry-leading investment results, an efficient cost-structure and client-focused service in order to secure the sustainability of the Plan over the long term.
This year, we became one of the few organizations in all of Canada to implement SimCorp Dimension, a best-of-breed integrated portfolio management and investment accounting system, which supports our sophisticated portfolio. While we’ve always had strong investment expertise, SimCorp Dimension provided a way to enhance the solid work of our investment and finance teams while providing new avenues for future investing.
Together with a new liability modeling tool, SimCorp Dimension is part of a new phase in the transformation of HOOPP’s investment management and administration infrastructure. Collectively, this work is central to our liability-driven investment and risk management strategies and provides us with a solid platform for future growth and evolution.
We have also been recognized for our commitment to environmental sustainability standards in our real estate portfolio by striving to achieve Leadership in Energy and Environmental Design (LEED) certification on investments and developments, and continually monitoring health and safety practices of all external property managers and contractors to ensure they are best-in-class.
This past year, HOOPP opened the doors to Telus House Tower, a state-of-the-art office building in Toronto, the AeroCentre V office building in Mississauga and Willingdon Park Phase 8 and 9 in Vancouver.
These commercial developments reflect our commitment to greater environmental and social stewardship and to sustainable development – it’s just one example of how we continue to build a high level of trust within our strong partnerships.
Responding to the needs and expectations of our clients is also of paramount importance to us. We have continued enhancements to transactional and self-service website services such as HOOPP Connect for our members and pensioners, and HOOPP ESE for our employers. We have also established an Employer Advisory Council to guide the identification and development of best practice solutions.
Demonstrating HOOPP’s value to the entire healthcare community remains as one of our top priorities. In our commitment to protect the interests of our members and pensioners, we have increased our visibility with public policymakers to advocate for changes that affect the Planand to bring some insight into areas where pension, investment or other reform is needed.
To this end, in February, we released a White Paper entitled Meeting the Demographic and Retirement Challenge, which featured the views of healthcare providers and stakeholders who attended a HOOPP symposium. The White Paper included key findings on the extension of pension coverage to the growing community health sector, the ease of keeping pension benefits when healthcare workers change jobs, and the need to attract more young people to healthcare professions.
Later in the year, we hosted our first Think Tank in November with close to 50 healthcare thought leaders gathered at the University of Toronto’s Munk Centre to discuss quality healthcare and the sustainability of the system. One of the key reasons HOOPP has delivered on its pension promise for 50 years is simple: our people.
Our culture of excellence was recognized this year as one of Canada’s 10 Most Admired Corporate Cultures, reflecting the very best of our organization – our commitment to providing a secure retirement for those who take care of us, our promotion of an atmosphere of mutual respect and understanding, and our dedication to fostering a culture that is literally award winning.
Why is a culture of excellence so important? It’s simple: good people do good things and produce good results. At HOOPP, a promise made is a promise kept. It’s clear... we are invested in the work we do.
A few more points on HOOPP's culture of excellence (read pages 9-11 carefully; below are the passages I focus on):
At the core of what guides HOOPP is the goal that all healthcare workers have a financially secure retirement.And a key passage on page 11, on the importance of a collaborative team:
“We’re all very focused on delivering on that pension promise,” says Jim Keohane, Senior Vice President, Investments and Chief Investment Officer. “We take that to heart – it’s not just something we say. It’s something we live.”
This is the underlying principle that directs HOOPP’s investment team when it comes to making decisions – after all, HOOPP not only administers the pension plan – it invests member and employer contributions to ensure that pensions can be paid now and in the future.
In fact, approximately 80 cents of every pension dollar comes from investment returns while the rest comes from contributions.
Managed in-house by an experienced team of 37 investment professionals, HOOPP’s Fund was valued at more than $35.7 billion in 2010.
In recent years, HOOPP has started moving to liability- driven investing (LDI) in managing the Fund, which seeks to have sufficient assets to meet all liabilities – both
current and future.
Operating within an LDI framework allows HOOPP to explore approaches that manage asset and liability risk together and enhance returns through controlled risk-taking.
Keohane notes that, because HOOPP was conservatively positioned, HOOPP’s investment team not only stayed the course at the bottom of the market – the focus shifted towards the opportunities that were available.
“Is that just luck?” Catford asks. “Well, you certainly can’t get lucky every year. HOOPP has a track record of making sensible investment decisions.”
“The core of what we do is support entrepreneurs,” says Andy Moysiuk, Managing Partner of HOOPP Capital Partners. “We are a quiet sponsor in the creation and nurturing of companies. We prefer to let entrepreneurs appropriately take the credit for their own success – and that’s at the core of our culture.”
Moysiuk, who is the longest serving leader of a private equity program within an institution in Canada, notes that HOOPP Capital Partners exercise “continuous due diligence” in determining who to partner with and what industry domains to pursue for investment.
HOOPP has been recognized by the industry for its thorough approach.
“We’re a product of collaboration and we’re defined as much by what we don’t do as what we do do,” Moysiuk says.
He adds that HOOPP’s team stays within their core competencies with the view that long-term investing means the duration of hold is anywhere from 3 to 10 years and volatility is expected on a year-to-year basis.
“But we’ve got our eye on the prize: long-term value creation,” he says.
With just 37 investment professionals on staff with a combined experience of 600 years, Keohane notes that HOOPP’s investment management team is considerably smaller than might be expected and runs very efficiently. By virtue of the team’s size and culture of collaboration, it is able to communicate effectively and react nimbly to change.The folks at HOOPP get it. It's not about satisfying their personal egos, it's all about delivering the pension promise so that their members can retire in dignity and security.
HOOPP’s investment portfolios are designed with the future pension income needs of members in mind. “We’re not investing for the sake of investing.
We’re not taking risk for the sake of taking risk,” says Long. “We’re trying to achieve exactly what the plan member is trying to achieve: a dependable source of retirement income.”
Keohane agrees and adds, “HOOPP does make a difference in people’s lives. It’s really striking when you talk to retirees and they tell you that, because of HOOPP, they can retire in dignity – and that makes it much more satisfying to come into work every day.”
With HOOPP, members are not alone in working towards their financial goals. By virtue of their membership, they have access to a world-class investment team.
With an eye towards the future, HOOPP is committed to moving with the changing healthcare landscape and remaining the leading pension plan provider in the Ontario healthcare community.
Let me continue with Management's discussion and analysis of operations:
Against a backdrop of volatility where questions about the strength and stability of the economy and banking industry played out prominently alongside news of the European sovereign debt crisis, 2010 was a year where HOOPP’s net assets increased to $35.7 billion, up from $31.1 billion in 2009.And on funding risk, the most important risk of all pension plans, HOOPP is doing just fine:
This was achieved by identifying attractive investment entry points in the financial markets by focusing on the positive aspects of the economy. By remaining focused on the long-term view and anticipating how the various situations would play out in the markets, HOOPP was able to report strong results across its various portfolios, experiencing double-digit returns of 13.68% compared to 15.18% in 2009 and surpassing its investment benchmark of 10.31% by 337 basis points.
It’s important to note that defined benefit pension plans like HOOPP invest for the long term – not for year-over-year results – where pension contributions made today to fund benefits may not be paid out for 40 or more years.
During the last decade, HOOPP’s compound annual rate of return has been 6.28% which translates into $17.2 billion of value to the Fund for members and pensioners.
Because of its commitment to preserving the pension promise, HOOPP’s Board of Trustees is:
- holding contribution rates and benefits stable until at least the end of 2012
- Providing a 1.76% cost of living adjustment for all pensioners on April 1, 2011 (the adjustment is equal to 75% of the 2.35% increase in the consumer price index from December 2009 to December 2010).
The recovery of the markets benefited the Fund, with net assets available for benefits ending the year at $35.7 billion, up from $31.1 billion at year end 2009.In other words, HOOPP is fully funded which is almost unheard of nowadays. Just look at OMERS and Ontario Teachers' pension deficits.
Consistent with industry practice and for funding purposes, HOOPP applies a “smoothing” adjustment to net assets, which adjusts the value of the net assets based on the average of the five previous year-end net asset values extrapolated with cash flows and assumed rates of return to year end 2010. This adjustment has a moderating effect on investment gains or losses in a given year and is used to provide stability in pension plans.
The “smoothed” value of net assets as of Dec. 31, 2010, was $35.1 billion, up from $32.6 billion at the end of 2009. As of Dec. 31, 2010, the Plan’s total pension liabilities (the total value of future benefits owing to members based on service earned to date) were $34.9 billion compared to $32 billion at the end of 2009.
On operating expenses:
HOOPP’s 2010 operating costs were $129.2 million, down 1.6% from $131.3 million in 2009. The decrease is primarily related to strategic initiatives and the elimination of external investment manager fees. The decrease was partially offset by an increase in base annual operating costs largely attributable to higher staff levels and the introduction of the Ontario harmonized sales tax.All cynics who think that DB plans aren't better than DC plans should read that last point again. Not only is HOOPP among the top-tier funds in terms of performance, it's also fully funded and delivering outstanding results at lower costs than other similar organizations and retail mutual funds.
HOOPP’s operating expenses are lower than those of many other organizations that offer retirement benefits. While retail mutual funds often have administrative fees of 250 basis points or higher, HOOPP’s investment operating costs work out to just under 26 basis points.
On active management and its asset mix strategy:
HOOPP’s assets are actively managed in-house by professional money managers who apply a range of investment strategies and techniques to:On the use of derivatives (page 17):
HOOPP’s conservative asset mix was designed to reduce the Plan’s overall risk exposure by effectively matching assets with liabilities.
- maximize the Fund’s long-term investment returns within an acceptable level of risk, and
- operate a minimum risk portfolio
HOOPP’s asset mix strategy:
HOOPP’s asset mix target is 46% equities and equity- oriented holdings and 54% fixed income and was specifically designed to reduce the Plan’s overall risk exposure by matching assets with liabilities. The asset mix policy allows for a departure from the target by plus or minus 5%. This departure is permitted to:
- supports an LDI approach
- reduces the Fund’s exposure to equity markets, while increasing exposure to long-term bonds, real return bonds and real estate
- better aligns assets with future cash flow requirements, and
- provides the Plan with more effective protection against inflation
As of Dec. 31, 2010, the actual asset mix, with the effect of derivatives was 45.1% equities and equity-oriented holdings, and 54.9% fixed income. The Fund also employs additional return seeking strategies through the use of credit derivatives and equity futures, swaps and options. These strategies are considered return enhancing overlays to the government bond portfolio and do not deploy any Fund assets, so they are not reflected in the asset allocation shown at left.
- accommodate changes in the value of investments within a given portfolio, and
- take advantage of strengths or weaknesses in specific market segments
HOOPP uses derivatives to:Let me interject here and add some comments that Jim Keohane provided me on how HOOPP uses derivatives:
Derivatives give HOOPP added flexibility for:
- implement investment programs at lower cost, greater speed, and with less operational maintenance
- help mitigate investment risk
When HOOPP employs derivative strategies to replicate the returns in various asset classes, the actual assets that underlie those derivative strategies are invested in
- managing and rebalancing asset mix
- reducing transaction costs
- increasing liquidity
- managing foreign exchange risks
- implementing defensive strategies to reduce risks within portfolios
- generating value-added investment returns, and
- matching assets to liabilities more effectively (reducing the prospect of funding shortfalls)
short-term government securities and investment grade corporate short-term securities.
When measuring portfolio performance, the return is determined by combining the return on any applicable derivative contracts with the return on the underlying short-term securities, and this is compared to the appropriate benchmark return for the asset class.
Measures used to manage the risks associated with derivatives include:
- conducting an independent valuation of each derivative contract
- ensuring HOOPP has the liquidity required to meet obligations
- closely monitoring the total outstanding value of contracts with counterparties, and
- fully enforcing HOOPP’s right to counterparty collateral
- Let's say you wanted to buy US corporate bonds in cash market. You're taking duration risk, F/X risk and credit risk. Derivatives allow you to take credit risk and sell CDS without duration exposure and F/X risk.
- On F/X risk, Jim told me that HOOPP hedges all F/X risk using derivatives because they found using an asset liability approach, it's better to be fully hedged than 50% hedged. This was a surprise to me but he can explained they used to be 50% hedged when they were using an asset only approach but found that under an ALM approach, it was much better being fully hedged.
- Derivatives allow you to hedge beta risk. You can invest in long bonds and overlay equity derivatives to shift away from equity risk premium. Similarly, you can hedge the beta risk of a credit portfolio by using CDX indexes.
- As far as managing counterparty risk, HOOPP has many ISDA agreements with tight collateral limits which it tracks daily using its system to tell them when money is owed to them or when they owe money (bank or HOOPP has to post collateral in the form of bonds).
- Jim told me that HOOPP's long bond portfolio and real return bond portfolio (RRBs) makes between 4.5% to 5% and they layer on risk on top of that to achieve their actuarial rate of return of 6.75%. They take risk using derivatives and by investing in private markets. Their internal alpha operations are like a "multi-strategy fund".
- HOOPP has whistleblower policies but Jim told me that few people come forth to blow the whistle in any organization because of fear of losing their job and being ostracized. This is true which is why I would discuss policies with certified fraud examiners. And on fraud, internal auditors at HOOPP report directly to the board, which is the way it should be at all pension funds.
HOOPP manages absolute return strategies to income to the Fund regardless of how the markets perform.The discussion on on investment performance starts on page 19. here are some key points:
The combined use of physical securities and derivatives ensures only residual investment risk remains and income will emerge over the term of the investments. The absolute return strategies contributed 1.77% – or $544 million – to the Fund’s overall return.
- HOOPP’s Canadian equities portfolio reported a return of 17.38% (net of fees) on the year – compared to its benchmark, the S&P/TSX60, which had returns of 14.98%. By comparison, the portfolio returned 34.42% in 2009.
- As in Canada, U. S. equity markets were led by the cyclical sectors such as Consumer Discretionary and Industrials. HOOPP’s U. S. equity return, after converting back into
Canadian dollars, was 16.78%.
- The return for HOOPP’s non-North American equity portfolio, after converting back into Canadian dollars, was -2.50%, lower than the benchmark of -2.32%.
- HOOPP made several important real estate acquisitions. At year end, real estate accounted for 11% of the Fund’s total net assets with total value of net equity in the portfolio standing at $3.9 billion, versus $3.3 billion at year end 2009.
- HOOPP's private equity portfolio generated a return of 9.70% for the year. It is important to note that private equity is a long-term asset class that does not lend itself to the annual benchmarking methodology typically applied to public market portfolios. Instead, HOOPP applies an absolute hurdle rate of return threshold as the basis for assessment of whether the asset class is contributing to the organization’s long-term investment objectives.
- This benchmarking approach has encouraged a flexible portfolio design which is complimentary to HOOPP’s broader investment activities, all of which are organized
around the satisfying of long-term pension obligations.
- At year end, the carrying value of the portfolio stood at $1.8 billion, up from $1.5 billion a year earlier. At 5.2% of the total Fund, the private equity portfolio has scope for growth and is well positioned for investment opportunities of all sizes.
- Finally, HOOPP finished the year with 54.9% of its assets invested in fixed income. Looking ahead, the Asset Liability Management (ALM) strategy will see a marginal increase
of fixed income at HOOPP, allowing increased exposure without diminishing other exposures within the Fund. HOOPP’s universe bond portfolio, reported a return of 9.54%, while its long bond portfolio returned 17.35%. The corporate credit portfolio was up 1.71%.
As far as managing downside risk, it's worth noting that HOOPP was the best performing pension fund in 2008. I keep coming back to that comment because many pension fund managers completely neglected their fiduciary responsibility of capital preservation. You got to cap downside risk when managing pension assets, something that HOOPP started implementing after the tech meltdown where they went from over-funded status to underfunded status.
I will end by simply stating that HOOPP is one of the best DB plans in North America and among the best in the world. They don't get the media attention of Teachers' or OMERS but they should. It's a private DB plan so compensation isn't public but I know they do not get Teachers' style compensation (and if you look at their benchmarks, much tougher than those of Teachers'. In fact, their value added would have been almost twice as much if they used Teachers' benchmarks).
If you need proof that large DB plans can work successfully and that they're much better than DC plans, look no further than HOOPP. I just wish they were managing pensions for all healthcare workers in Canada so that my father, brother and friends could invest their retirement money with them. In fact, I think all pension plans should try to adopt HOOPP's approach and philosophy in managing retirement assets.
Finally, take the time to read HOOPP's 2010 Annual Report and watch a recent BNN interview with Jim Keohane I thank Jim, Martin and Andy for their input and will correct any mistakes in this comment if needed.