A successful defined benefits formula that blends governance, investment strategy and technology

John Crocker, CEO and President, HOOPP

Periods of recession often breed some of the most defining moments for the financial industry. For fund managers, in particular, such a moment manifests itself in the challenge of maintaining returns and curtailing any losses. When the financial crisis struck in 2008, this challenge was magnified, as funds struggled to simply stay afloat amidst a rapidly tumbling economy.

For Healthcare of Ontario Pension Plan (HOOPP), one of the largest pension funds in Canada with assets of over $35.7 billion, this challenge was no different. In order to ensure our ability to maintain our commitment to our pensioners through times of economic recession, we were forced to revaluate our strategy and adapt it to the new economic landscape.  

In the disastrous year 2008, HOOPP limited losses to -11.97 percent, due to a strategic decision to reduce our equity exposure in late 2007.   In 2010, HOOPP reported returns of 13.68 percent, following returns of 15.18 percent in 2009. In a time when public sector defined benefit plans are under fire in many jurisdictions around the world, HOOPP is 100 percent funded as of the close of 2010 – which essentially means we have enough assets to meet the pension needs of every single member of the plan with no funding shortfall. I’m often asked: How did we achieve this?

Funding – Managing the Liabilities

For more than 50 years, HOOPP has provided pension benefits for more than 260,000 healthcare workers in the province of Ontario. Today, HOOPP is fully funded and committed to paying more than $1.2 billion in annual pension payments to its retired members.

So how did we get here? After the “tech wreck” of 2001 - 2002 – which followed a long period of high investment returns – HOOPP’s Board of Trustees felt that the fund needed to find a way to protect our portfolio from the risk of volatility. Our governance structure is somewhat unique: HOOPP is a private pension fund governed by a joint board that has equal representation from employers and members.

The approach our Board adopted was liability-driven investing (LDI). Under this system, assets were aligned to the future income needs of members. Although bonds provided the steady income stream that best matched what our members need, we also needed to spark the right amount of growth to keep the Plan funded moving forward.

The best way to achieve this was to align our investment targets to our funding target, which is currently 6.63%. Rather than trying to beat an industry benchmark, our goal was to get the “right” level of returns to meet that target each year. This allows HOOPP to consistently remain in a “funding sweet spot” of around 100 percent funded, which means benefits and contribution rates can stay stable.  As a result, HOOPP’s contribution rates haven’t changed since the beginning of 2004 and will stay the same until at least the end of 2012.

Another important component of this approach is working towards a “minimum risk” portfolio. For example, rather than selling a bond to buy a stock, which carries many risks, the fund has exposure to stocks through derivatives. That gives HOOPP the potential for upside growth, but the security of always having the underlying asset, typically a bond.

An Assist from Technology

Moving to an LDI strategy, one that features a strong use of derivatives, quickly proved that HOOPP’s existing investment technology was not going to be able to support its new strategy. It was hard, in the prior system, to track our exposure across all asset classes without time-consuming manual processes.

So HOOPP set out on a multi-year program to upgrade its investment technology. The goal of this program, called the Investment & Funding Initiative, was one of the largest technology projects in the history of our organization, and has delivered improvements in the following areas:

  • Streamlined derivatives processing
  • Automation of month-end accounting
  • Improved treasury management capabilities
  • Improved data controls around workflow, data management, data integrity, trade workflow and reconciliation, as well as automated performance measurement reporting.

In order to support both our existing investment strategy and our future strategy, we knew technology was going to play an important role in our ability to achieve our goals. We knew that without a technology infrastructure that allowed us to scale and grow, our growth would be inhibited. After careful review, we chose to work with SimCorp Dimension, a front-to-back office investment platform.

The defined benefit pension model can work – and is the most efficient way of delivering meaningful pension income in retirement – if a number of principles are followed. You need good governance, investment expertise, an investment strategy that recognizes the long-term needs of a pension plan, and finally, the right technology. It’s truly a winning combination.

John Crocker is President & CEO of the Healthcare of Ontario Pension Plan

This article was published 13 June 2011 in the Institutional Investor, http://www.institutionalinvestor.com/Article/2847272/A-Successful-Defined-Benefits-Formula-That-Blends-Governance-Investment-Strategy-and-Technology.html?ArticleId=2847272