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May 24, 2022

PLANS CAN WITHSTAND ENVIRONMENT

Canada’s major pension plans are capable of withstanding the environment of elevated inflation and a deteriorating growth outlook, says Fitch Ratings. In a report, it says the Canadian pension plans that it rates ‒ such as OMERS, the Ontario Teachers’ Pension Plan, and the Healthcare of Ontario Pension Plan (HOOPP) ‒ are poised to retain their AAA ratings and stable outlooks in the face of heightened market volatility alongside high inflation and growth pressures. High inflation threatens to increase funding risk for pension plans, while headwinds to global economic growth will pressure investment returns, it says. However, the major Canadian pension plans should be able to manage these challenges. Canadian pension funds’ long-term investment horizons, captive inflows, relatively predictable outflows, asset diversification, and strong liquidity remain supportive of their existing ratings, it says.

May 24, 2022

BUY-OUTS AVOIDING ILLIQUID ASSETS

Alpha Real Capital, a specialist manager of secure income real assets, is warning that UK defined benefit pension schemes targeting buy-out may be unnecessarily avoiding illiquid assets. This means they may be investing sub-optimally as illiquid assets not only bring return benefits, but can be a good source of assets that match inflation linked liabilities. They also bring resilience to pension scheme portfolios. These illiquid assets include commercial ground rents and various types of private credit and infrastructure assets. It says the reason pension schemes tend to avoid illiquid assets is a feature of the bulk-buyout market it has termed the ‘Liquidity Kink.’ While illiquid assets are attractive to buy-out providers to back the liabilities they take on from pension schemes, providers typically only accept cash or UK government bonds as part of the buy-out transaction. This means pension schemes are shying away from buying these assets if they are targeting buy-out and, therefore, have portfolios that carry more risk than they should. However, it contends pension schemes targeting buy-out should still consider illiquid assets as the typical buy-out transaction can take eight months or more and there are a number of options to allow for illiquid assets when transacting. All of this means it is worthwhile for schemes to consider illiquids even if buy-out is the end goal, it says.