Author: Ted Ballantine

Last year saw Canada’s largest pension funds pour tens of billions into public companies, toll roads, infrastructure and real estate.

This week, the Globe & Mail put together a list of the seven biggest deals struck by Canadian pension funds in 2015. Read on:

1. ANTARES

Pension Plan: Canada Pension Plan Investment Board

Total Deal Value: $12-billion, including a $3.85-billion equity stake

What they got: General Electric Co.’s private-equity lending business, which targets smaller companies in several industries. The pension plan had been watching for business opportunities in this space for several years, and seized on the chance to avoid having to build operations from scratch.

2. TRANSGRID (99-year lease)

Pension Plan: Caisse de dépôt et placement du Québec

Total Deal Value: $7.4-billion

What they got: Long-term control of about 13,000 km of the electricity transmission network of the state of New South Wales in Australia, along with investment partners. These high-voltage power lines reach economic and political capitals in the country and help diversify the pension plan’s assets by geography.

3. FORTUM DISTRIBUTION AB

Pension Plan: Ontario Municipal Employees Retirement System

Total Deal Value: $7-billion

What they got: A 50-per-cent stake in the second-largest electricity distribution business in Sweden, alongside some local pension plans.The solid regulatory environment and OMERS’ goal to increase its exposure to infrastructure were driving forces behind the deal, along with the relative scarcity of big, desirable electricity assets. The business has since been renamed Ellevio.

4. HUTCHISON 3G UK HOLDINGS (CI) LTD.

Pension Plans: Canada Pension Plan Investment Board and the Caisse de dépôt et placement du Québec

Deal Value: $4.8-billion

What they got: A slice of a major U.K. telecom business. Hong Kong billionaire Li Ka-shing’s firm Hutchison Whampoa Ltd. bought U.K. telco O2 for £9.25-billion to merge it with his existing telecom operator Three UK, but he needed some investment partners to get the deal done. Two Canadian funds stepped in, along with some other investors, to acquire one-third of the merged company. The deal was a chance to cozy up to a new investment partner with a global network.

5. INFORMATICA CORP.

Pension Plan: Canada Pension Plan Investment Board

Deal Value: $4.7-billion

What they got: To privatize a growing big data company alongside a partner. The deal saved Informatica from a fight with an activist investor. The California-based software developer helps other companies make their data more useful.

6. SKYWAY CONCESSION CO. LLC

Pension Plans: Canada Pension Plan Investment Board, Ontario Municipal Employees Retirement System and Ontario Teachers’ Pension Plan

Deal Value: $2.8-billion

What they got: The Chicago Skyway Toll Bridge System, split three ways. The pension plans jointly acquired a 88-year lease of the well-established system that connects downtown Chicago and its southeastern suburbs.

7. HERITAGE ROYALTY LP

Pension Plan: Ontario Teachers’ Pension Plan

Deal Value: $2.6-billion

What they got: A portfolio of land and oil and gas royalties in Western Canada, sold by Cenovus Energy Inc. for some badly needed cash. Teachers said its “opportunistic” deal had secured a steady stream of the company’s future revenues.

 

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The collective funding status of corporate DB plans fell 1.6 percent in February, according to the BNY Mellon Institutional Scorecard.

That marks the fourth consecutive month that corporate DB funding has declined; the typical plan is now 78.7 percent funded, according to the scorecard.

More from BNY:

Interestingly, the 2.3 percent increase in liabilities that corporate DB plan sponsors saw in February was higher than the returns of most asset classes over the course of the month. Of the asset classes the scorecard tracks, Global Fixed-Income and Long Duration Fixed-Income assets performed the best, with both returning 2.2 percent. Emerging Market Debt, REITs and High Yield Bonds were also slightly positive, with 1.3, 0.9 and 0.6 percent returns, respectively. International equity was the worst performer, falling by 1.1 percent in February.

“For over a decade, most plan sponsors and investment managers have been calling for a rise in interest rates. 2016 is shaping up to be another humbling year in that regard,” said Andrew Wozniak, head of BNY Mellon Fiduciary Solutions. “On the funding front, a number of our clients are exploring the possibility of making voluntary contributions to mitigate the pain associated with rising variable Pension Benefit Guaranty Corp. premiums and lower funding ratios.”

In February, public DB plans and endowments & foundations also missed their return targets—though only by a small margin. Public plans missed their target of 7.5% annual returns by 60 basis-points; and endowments & foundations missed their target of 5% returns over inflation and spending by 50 basis-points. Both types of investors are heavily weighted toward alternative assets, which account 27 percent of typical public DB portfolios, and 57 percent of endowments & foundation portfolios.

View the scorecard here.

 

Photo by Sarath Kuchi via Flickr CC License

Officials representing the IMF and other creditors arrived in Greece on Wednesday to inspect the progress of the country’s pension reforms, which are a key condition the international bailout agreed to last year.

Greece offered its own pension reform plan in early 2016; but it wasn’t steep enough for the IMF. Additionally, creditors objected to parts of the plan that could put further stress on government finances.

More from CNBC:

Bailout inspectors returned to Greece on Wednesday to complete a review of the government’s economic reforms, which is needed before the country can get more rescue loans and much-needed debt relief.

The officials representing Greece’s European creditors and the International Monetary Fund are expected to discuss the government’s plans to manage the rising number of banks’ bad loans and to overhaul the troubled pension system.

The inspectors are monitoring progress of measures demanded under Greece’s third international bailout agreed last year with left-wing Prime Minister Alexis Tsipras.

“There are differences between the two sides, but that is the subject of our negotiation,” Economy and Development Minister Giorgos Stathakis told parliament before meeting the inspectors. He denied claims the negotiations have stalled.

Pierre Moscovici, the EU financial affairs commissioner, said a swift conclusion of the negotiations in Athens would pave the way for a debt relief deal that was likely to improve repayment terms but not see any direct debt reduction.

Read more P360 Greece coverage here.

 

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Caisse de depot et placement du Quebec – Canada’s 2^nd-largest pension fund – revealed on Wednesday it’s plans to open its first office in India.

The fund will be scouting South Asian investments across all asset classes.

More from Reuters:

Canadian pension funds are expanding into new territories and investing directly in assets such as infrastructure and real estate as they seek alternatives to volatile global equity markets and low-yielding government bonds.

India is viewed as a prime investment opportunity, given its rapid economic growth and burgeoning middle class. The Canadian Pension Plan Investment Board, Canada’s biggest public pension fund, set up an office in Mumbai last year to scout for opportunities.

Caisse Chief Executive Officer Michael Sabia in a statement cited India’s “scope and quality of investment opportunities, the potential for strategic partnerships with leading Indian entrepreneurs, and the current government’s intention to pursue essential economic reforms.”

The Caisse also announced a commitment to invest $150 million in renewable energy in India.

Caisse managed about $230 billion in assets as of June 2015.

 

Photo by  Thangaraj Kumaravel via Flickr CC License

Pennsylvania Governor Tom Wolf has been harping on the state pension funds’ investment expenses for over a year, and included a fee reduction initiative in his 2015 budget proposal.

That proposal didn’t pass – but the state’s two major pension systems independently cut millions in management fees last fiscal year, according to data released by the systems.

More from the Associated Press:

The Public School Employees’ Retirement System says its fees fell from $558 million in the year that ended in mid-2013 to $455 million in the year that ended July 1.

That’s an 18 percent reduction of $103 million over two years.

The State Employees’ Retirement System’s fees fell about 10 percent between 2014 and 2015, from $177 million to $159 million.

That’s a drop of $18 million.

SERS says its fees are down by more than $76 million since 2010.

Pension officials haven’t yet detailed how they achieved the savings.

 

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Later this month, a suit by retirees over frozen pension COLAs will hit the halls of New Jersey’s highest court.

In 2011, New Jersey lawmakers passed a pension reform package that raised retirement ages, increased worker contributions and froze COLAs unless the pension plans surpassed a certain funding benchmark.

Workers argue the law was a breach of contract, especially because Gov. Christie – who signed the bill, which required full annual payments from the state – didn’t hold up his side of the bargain.

A lower court ruled against the retirees.

More from NJ.com:

The state Supreme Court will hear oral arguments later this month in a case addressing whether the state must restore retired public workers’ cost-of-living adjustments.

Retirees argue that a state law freezing their COLAs ran afoul of their rights to their pension benefits. The state’s high court is scheduled to hear arguments at 10 a.m. March 14. The outcome could wipe out tens of billions of dollars lawmakers expected to save the pension system over three decades.

All together, those changes were to save the state $122 billion over 30 years, and the COLA suspension accounted for more than half of those savings.

Senate President Stephen Sweeney, who partnered with Christie on the 5-year-old reforms, has said losing the case and being forced to restore the increases and reimburse retirees could cripple the already shaky system.

Moody’s Investors Service weighed in in January, saying that the state portion of the total unfunded pension liability would increase from $40 billion to about $53 billion, and the system would fall from 51 percent funded to 44 percent funded if the court strikes down the freeze.

Oral arguments will begin on March 14.

 

Photo by  Lee Haywood via Flickr CC License

CalSTRS said over the weekend that the fund is joining a German securities lawsuit against automaker Volkswagen.

CalSTRS has been a long-term shareholder of the company, whose shares have plummeted since a 2015 scandal that saw the automaker admit to deceiving emissions tests.

More from PlanSponsor:

Since the September 2015 revelation of Volkswagen’s fraudulent activities, illegal and intentional wrongdoing to manipulate emissions testing, VW’s share price has dropped significantly. The litigation is currently in the planning process, with additional plaintiffs to be announced in the near future.

“Volkswagen’s actions are particularly heinous, since the company marketed itself as a forward thinking steward of the environment,” says CalSTRS Chief Executive Officer Jack Ehnes. “Its deceitful and hypocritical actions ultimately caused great harm to the atmosphere and the emissions cheating scandal has badly hurt the company’s value.”

Ehnes continued, “As an actively involved, long-term shareholder, CalSTRS places utmost importance on our fiduciary duty to our members to attempt to recover losses due to such wrongful conduct, while also communicating a clear message to VW, as well as the entire automotive industry, that we will not tolerate these illegal actions.”

According to a CalSTRS statement, German securities litigation is unlike United States securities class actions because shareholders in German companies are not entitled to a pro-rata share of recovery unless they affirmatively join a case, as CalSTRS is doing. A majority of CalSTRS shares in Volkswagen AG, valued at $52 million (353,988 shares as of December 31, 2015) in common and preferred stock, were purchased on foreign exchanges.

CalPERS is also planning to sue Volkswagen, but it will be a separate action.

 

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Flat-rate and variable-rate premiums are set to increase significantly over the next three years, and that’s forcing corporate pension plans to consider changing the way they manage themselves, according to a new survey.

More on the NEPC survey, from CIO:

Two-thirds of corporate pensions will change how they manage their plans in response to skyrocketing Pension Benefit Guarantee Corporation (PBGC) premiums, according to NEPC.

With flat-rate and variable-rate premiums set to increase over the next three years by 25% and 35%, respectively, plan sponsors are looking for ways to close funding gaps, NEPC Partner Brad Smith told CIO.

“A lot of our clients were saying, ‘Hey, this is a big deal, this has got our attention,’” Smith said. “Given the magnitude of the increase, it’s not really surprising.”

To avoid paying increasingly costly PBGC premiums—up this year to a $64 fixed rate and $30 variable rate—plan sponsors are turning to higher contributions, lump sum payouts, and pension-risk transfers.

Of the 66% who planned on changing their plans, 32% said they were considering making higher contributions. Another 32% cited the possibility of lump sum payouts.

A smaller proportion, 17%, said they would look into partial risk transfers.

“We’ve seen over the years a pretty significant increase in the number of plan sponsors at least evaluating the merits of a partial plan termination, and for those plan sponsors on the bubble this could be the data point they need to make it more economical for it to occur,” Smith said.

 

Photo by Sarath Kuchi via Flickr CC License