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Benefits and Pensions MonitorLarry Johnson Director, Pension Investments Abitibi-Consolidated Master Trust Larry Johnson has been with Abitibi-Consolidated, a major forest products company, and its predecessor companies for 23 years. He was originally in marketing and strategic planning and became director of pension investments four years ago. As the single staff member in charge of pension management, Johnson is responsible for the investment of the master trust, owned by 25 pension plans that have a total of 25,000 participants split evenly between active and retired. The trust includes Defined Benefit, Defined Contribution, and hybrid pension plans.
Larry Johnson picked a challenging time to take on responsibility for the pension funds of Abitibi-Consolidated. Johnson became director of pension investments in 1999. Not only was it the tail-end of the bull market, but since then the company has gone through a significant merger and a major adjustment to its governance structure. “One big advantage I inherited was a decision made in 1998 to put half of the Canadian Master Trust pension fund in bonds, 80 per cent of which had a long duration,” says Johnson. “That helped us weather the impact of rising pension liabilities due to the subsequent decline in interest rates.” In 2000, Abitibi-Consolidated acquired rival Donohue Inc., merging $900 million of assets into the master trust. While Donohue had about 60 per cent of its pension assets in equities, the fund’s board stuck by the high allocation to bonds in the merged fund, partly due to concern that equity markets were overheated. At that time, the $2.4 billion fund’s asset mix consisted of 50 per cent bonds and 50 per cent equities, with the equities split into 20 per cent Canadian, 17 per cent U.S., and 13 per cent offshore. Looking for ways to further reduce exposure to equities, at the end of 2001, Johnson invited two consulting firms to present the board committee with their answer to the question: If you did an asset study for a plan like ours, what would your recommendations likely be? “So, without doing a full-blown asset liability study, we quickly got some thoughtful recommendations. And, there was a fair amount of agreement between the two firms with regard to the things we should look at.” Out of the recommendations, Johnson chose to focus first on understanding absolute return strategies using a fund of hedge funds approach, since they seemed to have the biggest potential to improve the fund’s risk/return profile. However, during the year spent investigating the prudence of hedge funds, a new diversification option arose – income trusts. “Abitibi-Consolidated created an income trust for a non-strategic asset and, during that process, we realized that those trusts, with their strong emphasis on cash payout, would be a good diversifier for the Canadian equity portion of our fund.” Therefore, in December 2002, the board committee agreed to allot four per cent of the fund to income trusts. It also decided to allocate six per cent to absolute return strategies. “We wanted the commitment to be significant enough to make a difference in the fund.” The new asset mix, implemented July 2003, consists of 50 per cent bonds; 40 per cent equities (split into 17 per cent Canadian, 13 per cent U.S., and 10 per cent offshore); six per cent absolute return; and four per cent income trusts. Review Of Governance Structure While making changes in the asset mix, Johnson also worked on a new approach to governance. Until 2002, a sub-committee of the board of directors was in charge of all aspects of the pension fund, including manager selection and monitoring. “We felt that was pulling our board members down to too detailed of a level. We also had the expertise internally to handle a lot of those tasks. So, we convinced the board to change its approach.” In the new structure, the board remains the ultimate fiduciary for all retirement plans and continues to delegate full decision- making authority for pension investments to a sub-committee called the Human Resources and Compensation Committee (HRCC), made up of five independent directors. The HRCC approves changes to asset mix and funding policy, but delegates essentially all other investment tasks to a committee of company management called the pension investment committee (PIC). The PIC’s responsibilities include investment manager selection, monitoring, and termination; selection of custodians and actuaries; and mergers and splits of pension plans. Daily operations are executed by finance and human resource staff as well as external providers and consultants. Looking Forward With the primary objective of diversifying the fund complete, the fund’s next goal is to reduce the number of money managers. Before the new mandates, the fund had 12 managers. That number increased to 15 with the addition of the income trust and the hedge fund initiatives. With the fund more diversified, Johnson doesn’t believe it needs as many managers on the equity side to provide diversification. Johnson also anticipates further expansion into hedge funds. “I wouldn’t have recommended going into hedge funds of funds if I didn’t think that, at some point, the allocation could be 10 or 15 per cent of our fund.” |
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