Pension funds bounce back in absence of fierce bear

Date: Thursday, April 1, 2004

Alberta's largest pension fund posted healthy gains in 2003, as investment returns bounced back following the steepest bear market in decades.

The $10.1-billion Local Authorities Pension Plan (LAPP) -- whose members include nearly 148,000 active or retired Alberta municipal employees, health-care workers, nurses and non-teaching school board staff -- posted a 13.6 per cent gain last year.

The uptick marked a big improvement from 2002, when the Edmonton-based pension fund suffered a 5.8-per-cent decline, and 2001, when the fund shed 4.1 per cent of its value.

LAPP's recovery mirrors that of other large pension funds across the country, as most posted double-digit gains for 2003 on the strength of resurgent stock markets and solid returns from bonds and real estate.

Earlier this week, LAPP's Ontario counterpart -- the $32.7-billion Ontario Municipal Employees Retirement System (OMERS) -- reported a 12.7-per-cent return for 2003. And in February, the giant Ontario Teachers' Pension Plan, with $75.7 billion of assets, reported a gain of 18 per cent.

OMERS' returns, which trailed the pension sector average of 15.5 per cent for 2003, were undercut by hefty writedowns on its real estate, private equity and infrastructure portfolios. The writedowns followed a decision to adopt lower appraised values for certain holdings.

For its part, LAPP generated its biggest returns last year on Canadian stocks (up 25.9 per cent), foreign stocks (up 11.3 per cent), and real estate (up 10 per cent).

Bonds and mortgages gained 7.6 per cent, while cash and short-term investments yielded 2.9 per cent.

Stocks accounted for 57.4 per cent of LAPP's assets at the end of 2003, while fixed income investments such as bonds and mortgages comprised 33 per cent.

Most of the rest was held in real estate (6.4 per cent) and so-called alternative investments (3.2 per cent).

While Ontario Teachers' racked up the third-best year in its 14-year history, it recently warned of a pending $6.2-billion funding shortfall, as the proportion of pensioners ramps up. But LAPP is in good shape, says Blake Walker, the fund's director of pension investments.

"About 40 per cent of our members are retired and about 60 per cent are still active, so the plan is still in a growing phase. Contributions are coming in slightly higher than pension payments going out, plus we have the cash flow from our investments," he says.

"The pension promise is still secure. Retirees don't have to worry about receiving their pension, just because we had a couple of negative years."

Looking ahead, Walker says LAPP's strategy is to reduce its exposure to publicly traded equities to just 42.5 per cent of the mix, from the current 57.4 per cent. Meanwhile, it expects to boost real estate assets to 10 per cent and alternative investments to 12.5 per cent.

"The trend will be less market-traded equities, and we'll be replacing that with alternative investments such as private equity, hedge funds and infrastructure," says Walker, who served as treasurer of Regina's Farm Credit Corp. and director of investments with Saskatchewan's department of finance before joining LAPP four years ago.

He stresses that LAPP's decision to invest in alternative investments has been made "on a total portfolio basis" and as part of its long-term strategy to boost absolute returns.

"Given our outlook for modest single-digit capital market returns in the future, the challenge is to find alternative investment strategies that offer the potential for higher and more stable returns, compared with traditional stocks and bonds," he says.

That said, LAPP is taking a go-slow approach to revising its asset mix. While private equity -- in other words, equity stakes in private or venture-stage companies -- will ultimately make up five per cent of its asset mix, it only accounts for about one per cent currently.

"We have a five-per-cent allocation, or about $500 million, and we have committed about $112 million so far. We hope to double that commitment in the next few months," says Walker. He couldn't say whether LAPP has invested in any Alberta firms to date.

"We're not investing in a portfolio or making those investment decisions ourselves. Alberta Revenue is our general investment manager, and they use a fund-of-funds approach. So they'll hire fund managers who will in turn invest in other funds, and those managers make the direct investments."

Those investments could take place anywhere in the world, and are assessed strictly on the basis of investment merit and the level of risk involved, says Walker.

"There may be some money that flows into Alberta. But our focus is global. Ours is not a decision, implicitly or explicitly, to invest in Alberta or Western Canada. It's where we think the best investment opportunities lie," he adds.

Ditto for the roughly $250 million that LAPP has allocated for infrastructure projects.

Says Walker: "I don't know offhand if there has been anything invested directly in Alberta. The mandate is to invest in Canadian infrastructure."