Largest Canadian pensions positioned to manage coronavirus risks: Fitch
BY Staff | July 10, 2020
Canada’s largest pension funds are expected to weather the ongoing market turmoil within their respective ratings because of their long time horizon, ability to adjust contribution rates and the captive nature of their inflows, according to Fitch Ratings Inc.
Nevertheless, return expectations are under significant pressure, the rating agency noted in a recent release. “Fund performance will depend on asset mix, which is largely influenced by a plan’s maturity and risk appetite.”
To capitalize on the illiquidity premium, in recent years Canadian pension plans have generally increased exposure to private assets, including private credit, private equity, real estate and infrastructure investments, Fitch said. “Real estate and infrastructure investments can also provide an inflation hedge and, potentially, recurring income.”
However, while the illiquidity of private investments may lead to higher returns, these investments can also create more concentrated exposures to individual companies or sub-sectors if not carefully managed, it added.
Despite the increase in private assets, among the largest pension investors, fixed income and public equity still represent the largest percentage of average holdings as of year-end 2019.
Given the drastic market downturn, if Canadian pensions are able to take advantage of the dislocation in asset prices, it will support their overall long-term viability and this is likely as these investors entered the crisis with sufficient liquidity, Fitch said. “Liquidity is exceptionally strong for the Canadian pension plan peer group, with most having sufficient cash and short-term investments to repay all outstanding debt. As such, these plans can take advantage of investment opportunities when available, rebalance portfolios as necessary, meet margin calls on derivative transactions, refinance debt maturities when access to the capital markets is unavailable and fund current pension obligations.”