So, what do you do when your pension funds are hopelessly underfunded and haven't a chance of ever reaching breakeven again? Well, you just change national laws to allow them to swing for the fences by loading up on risky investments and hope for the best. Who cares...the losses are backstopped by taxpayers anyway, right?
According to Pensions & Investments, that is precisely what legislators in Canada have decided to do and it has sparked an asset rotation wave toward risky "alternative investments."
Canadian pension plan executives are starting 2018 expecting to invest more in alternative investments, specifically infrastructure and real estate, as the easing of funding rules in Ontario gives plans more opportunity to take on risk, sources said.
"This funding rule change is a game-changer," said Manuel Monteiro, partner and head of the financial strategy group at Mercer (Canada), Toronto. "It could change plan design, change investment strategies and should impact funding strategies."
Martin Leclair of Phillips, Hager & North has even coined a new term to describe the asset rotation among Canadian pension funds: "rerisking"....presumably because 'investing in the highest beta garbage possible at the highest valuation multiples of all time' was just too honest for marketing presentations.
The change will make higher-yielding investments like alternatives more popular among Canadian institutional investors as more money will be freed up for riskier investments with the potential for higher return, sources said.
"Any alternatives, infrastructure particularly," said Ian Struthers, partner and practice lead, Aon Hewitt Investment Consulting, Toronto. "We expect growth in those asset classes to continue, particularly among the large pension plans. It's easy for plans the size of Canada Pension Plan to do; they have long time horizons and huge asset inflows. But for small to midsize plans, they can take on more exposure to alternatives through diversified investments with external managers. But there's a lot of money looking for infrastructure and for real estate. There will be more interest in less vanilla kind of investments to add value, like brownfield projects."
Martin Leclair, portfolio manager at Phillips, Hager & North Investment Management, Toronto, said the move to those strategies already is happening. "What we're seeing from the solvency rule changes is a lot of rerisking. That's already happening. It's more about yield than about risk. So fundamentally, yes, there will be a lot of rerisking."
Leclair continues by saying that traditional bond and equity strategies just have no place in the portfolio of a modern 2018 investor and suggests that you'll have to be "creative" this year to "find alpha..."
"2018 will not be the year of one strategy, it will be the year of being creative," Mr. Leclair said. "Traditional bond and equity strategies will not get you there. You have to find alpha. These strategies are out there … I think you'll see departures from traditional benchmark-oriented strategies, away from being a 'closet indexer.'" PH&N Investment Management has C$90 billion in institutional assets under management, according to its website.
Which presumably means that the retirements of 1,000s of Canadians are about to be invested in Ripple?