CAAT Pension Plan Gains 16% in 2019

Yaelle Gang of the Canadian Investment Review reports that CAAT pension plan returns 16% in 2019, well-positioned to weather coronavirus storm:
The Colleges of Applied Arts and Technology pension plan saw a strong 2019, delivering a 16 per cent return, net of investment management fees, while growing its assets under management to $13.5 billion.

“On an absolute basis, all asset classes contributed positively to returns in 2019, with global developed equity, long bonds and real assets being the largest contributors,” said the annual report. “Interest rate and inflation hedging asset classes returned 11 per cent in aggregate, while return-enhancing asset classes returned 20.5 per cent. The plan’s currency hedging policy added 1.8 per cent to returns.”

For 2019, the CAAT plan is 118 per cent funded on a going-concern basis.

While 2020 markets have gotten off to a bumpy start, the CAAT plan has a long-term perspective. “Even though we are monitoring what’s going on in the marketplace, I don’t have any real concerns from an investment perspective at this time,” says Derek Dobson, chief executive officer of the CAAT plan.

He highlights the plan’s fairly large funding reserve and asset smoothing reserve, at $2.9 billion and $0.8 billion, respectively. “And the volatility in the marketplace hasn’t even used up our asset smoothing reserve yet. So we’re still very much [in] a strong, well-funded position.”

Further, the plan has a globally well-diversified portfolio, adds Dobson, noting the portfolio is performing as expected. “Clearly, with a 16 per cent net rate of return in 2019, I’m super pleased and proud that our asset mix and our team’s performance is exceeding my expectations.”

The CAAT also regularly conducts asset-liability modelling studies to measure its health against different scenarios. These studies have confirmed the plan can weather severe downside situations.

For its Jan. 1, 2020 valuation, the plan’s discount rate was lowered from 5.5 per cent to 5.15 per cent to reflect expected lower returns in the future.

“The lower discount rate marginally lowers the plan’s 2020 funded status, but increases the likelihood that its funded status will improve in the future because it is more likely that future investment returns will exceed the lower discount rate,” the annual report said.

Overall for 2019, Dobson says he’s most proud of the work the CAAT plan has done to expand defined benefit coverage in Canada, noting in 2019, it added more than 10,000 members by welcoming single-employer plans into its DBplus plan. “If we were to look at our purpose, which is to make simple, secure, valuable workplace pensions accessible to all Canadian workplaces, I think we made a major step — or even two or three major steps in 2019 — to contribute to the retirement income security industry.”
A little over a month ago, the CAAT Pension released its 2019 results, gaining 16% net and ending the year with $13.5 billion in assets (I waited till now to cover the annual year-in-review webinar):
The CAAT Pension Plan’s financial results, released today, confirm that the Plan is well-funded and has ample reserves to weather the recent investment market downturn. The Plan has been steadily building reserves over the past decade, consistent with the focus on benefit security.

The CAAT Plan concluded 2019 with a total of $13.5 billion in assets, up from $10.8 billion the previous year. The fund returned 16.0%, net of investment management fees, over the one-year period, and moved its 10-year annualized rate of return net of fees to 10.0%.

The health of the Plan is very strong. Based on prudent assumptions about the future, the Plan is 118% funded on a going-concern basis, with a $2.9 billion funding reserve, plus an additional $0.8 billion in asset smoothing reserves to absorb investment market volatility.

CAAT also regularly conducts asset-liability modelling studies to measure its health against a variety of diverse economic and demographic scenarios. These studies confirm the Plan will remain strong even under the most severe downside scenarios.

“The markets’ response to the COVID-19 pandemic has created near-term investment declines; but the Plan has prepared well for the unexpected,” explains Derek W. Dobson, CEO of the CAAT Plan. “The Plan’s globally diversified asset portfolio has also helped mitigate recent declines in the equity markets.”

“The lifetime pensions members have earned are not affected by short-term investment market fluctuations,” adds Dobson. “Our stability and focus on benefit security provide beneficiaries with peace of mind in an uncertain world.”

CAAT’s DBplus plan design has made secure defined benefit pensions accessible to more working Canadians in different sectors across the country. More than 15,000 members from 28 new employers have joined CAAT, representing nine industries across the for-profit, not-for-profit, and broader public sectors, and includes the support and participation of 14 different unions. Welcoming more groups of workers from across Canada will continue to strengthen the Plan.

Read the complete 2019 CAAT Pension Plan Annual Report, Valuable workplace pensions made simple (PDF).
Take the time to carefully read the complete 2019 CAAT Pension Plan Annual Report here, it's very well written and extremely transparent.

Yesterday afternoon, I had a chance to discuss CAAT's results and new membership drive with its CEO, Derek Dobson and its CIO, Julie Cays.

I want to thank both of them for taking the time to chat with me via Microsoft Teams and also thank John Cappelletti, Special Advisor to the CEO, for setting this up.

I began by asking them to go over last year's results. It was an exceptional year and Derek told me the CAAT Plan’s 10 year return is ranked #1 of the 39 funds with market value above $1 billion in the BNY Mellon Canadian Master Trust Universe.

Readers of my blog will recall that the Healthcare of Ontario Pension Plan (HOOPP) gained 17% last year, etching out CAAT Pension's return, but it's a much larger pension plan and unlike CAAT, it used a lot more leverage to achieve these incredible gains (CAAT's gains are unlevered not that there's anything wrong with the intelligent use of leverage).

What CAAT has in common with HOOPP is its funded status, 118% versus 119%, which is the ultimate measure of success of any pension plan (more on that later).

Anyway, below you will find 2019 highlights from the Annual Report:

Notice how even though the plan ended the year 118% funded, they still dropped the discount rate to 5.15% (nominal) to reflect lower interest rates and to mitigate risks of lower long-term investment returns.

Also, at the end of last year, the plan had $2.9 billion in reserves to protect against investment market declines and demographic shocks.

Again, this is prudent management of a pension plan and Derek Dobson is an actuary by training, so he really knows his stuff when it comes to pension plan design and sustainability.

Before Derek and I covered new members, Julie Cays briefly discussed last year's results and how she is positioning the portfolio this year in light of the COVID crisis.

First, have a look at CAAT's well-diversified asset mix, the net return vs policy benchmark over the last five years, the real return over funding target and last but not least, the net investment returns by asset class relative to benchmark:

Let me just say, every pension plan should present these charts and tables above in the same clear, coherent and transparent manner.

Looking at its asset mix, you can see that CAAT Pension has more weighting to public equities and bonds relative to its larger Canadian peers which have more of a 50/50 split between public and private markets.

In fact, 33% of CAAT's portfolio is in Global Diversified Equity, 10% in Emerging Market Equity, and 23% in nominal long and short-term bonds.

My former PSP colleague, Asif Haque, is CAAT's Director of Public Markets, and his job is to find managers which can add alpha over the benchmarks. I noticed he hired another PSP alumni, Razvan Tonea, as a Portfolio Manager to help him oversee external public market managers (they are both at the far end of the picture below along with some of their investment colleagues):

In private markets, 9% is invested in Private Equity and 15% in Real Assets which is made up of Real Estate and Infrastructure.

Kevin Fahey is the Director of Private Markets and he is standing in the middle above. He's doing an outstanding job growing CAAT's private markets and Julie told me they hired Adam Buzanis to help Kevin with Private Equity investments (I also recommended someone from PSP who had to move back to Toronto for family reasons).

What Julie Cays also told me is their Private Equity portfolio is still relatively young and they have "a lot of dry powder" to take advantage of opportunities as they arise.

Similar to OPTrust, CAAT tends to focus on middle market funds and smaller funds to build its relationships and they have obviously found solid partnerships across public and private markets.

They also co-invest with their partners on larger transactions to reduce fee drag.

Anyway, looking at the net investment return by asset class, the biggest gains in 2019 came from Global Developed Equity (+21.1%) followed by Private Equity (+15.5%) and Long-Term Bonds (+13.3%). Real Assets also delivered solid gains, up 11.4% last year.

Julie told me it was a great year but the COVID-19 selloff hit them in Q1 but they remain in good shape in term so funded status. "Still, we are focused on the long run and won't change our strategic allocations materially."

I told her I see this latest rally in stocks as nothing more than the mother of all bear market rallies as the Fed expanded its balance sheet by $3 trillion and she agreed and remains very cautious.

In fact, what's striking to me is profits in private companies are evaporating but the Fed's liquidity induced madness is leading to the zombification of public markets:

Other central banks are adding fuel to the fire, buying tech shares indiscriminately:

That's a topic for tomorrow's market comment, let me get back to CAAT Pension.

Derek Dobson and I spoke about growing and diversifying the Plan's new members which is part of its three strategic initiatives and part of a three-year strategic plan they adopted last year:

What Derek said was they added 15,000 members to CAAT's DB Plus through nine mergers, offering "cost certainty to employers" and "secure lifetime benefits at stable and appropriate contribution rates" for new members.

From these 15,000 new members, 10,000 were split among those that came from DC/ Group RRSP and the other half were DB plan mergers. The remaining 5,000 were inactive members.

I believe Derek told me it was easier to integrate DB plan members but whatever the case, CAAT is offering its pension plan management services to employers across Canada and in a post-COVID world, I would seriously reach out to them and learn as much as possible on DB Plus.

Derek told me they are focusing on the people, processes and systems and will be ready for a major expansion come July 1st. So far, they have been more "reactive" allowing employers to come to them but very soon, they will be more proactive and solicit new members who are looking to offer their employees a solid, secure, affordable DB plan.

He said the goal is to grow membership to 300,000 members from the current 61,000 members by 2027 and to grow assets to $70 billion from the current $13.5 billion during that timeframe.

That might sound like a lofty goal but I wish Derek and the entire CAAT team much success because they are actually offering something unique it employers across Canada.

OPTrust Select is a defined benefit (DB) offering, designed to enhance retirement security to employees who work for charitable, not-for-profit in Ontario but it's not across Canada.

Trans-Canada Capital is a subsidiary of Air Canada offering pension expertise to corporate and public DB plans but it's still in its early days.

I told Derek I personally know some high net worth blog readers of mine who despise annuities and would love to join a well-diversified DB plan but there's nothing available as of now. He said they're not there yet but it might come in the future.

Look, if CPPIB offered me a way to enhance my CPP above and beyond what the government legislated, I'd jump on the opportunity. Most Canadians would.

All this to say, I think CAAT Pension will grow by leaps and bounds over the next ten years and their success will translate into more retirement security for many Canadians looking to retire in dignity.

Again, take the time to read the complete 2019 CAAT Pension Plan Annual Report here, it's very transparent and well written and covers everything from Plan Funding to Investments.

The only thing CAAT Pension and HOOPP don't provide is full transparency on executive compensation which is a big no-no in my book (every pension in Canada should publish executive compensation in their annual report without exception and I don't care if it's private or non-profit).

Below, take the time to listen to CAAT's president & CEO Derek Dobson discuss the annual year-in-review webinar on benefit security.

Derek is an exceptional communicator and extremely well-informed on pension design and funding. He offers a great overview and I also embedded highlights from the 2019 year.

I thank him and Julie Cays for taking the time to talk to me yesterday and if there's anything I need to edit, just let me know.