2022 DCIF: How Saskatchewan’s PEPP is adding alternative investments to its DC plan portfolios

The PEBA, which oversees both the PEPP and the MEPP, is looking to build a $2-billion alternatives portfolio between both plans, he said. The PEPP’s alternatives journey began in 2017/18, when its board of directors approved its first allocations to private equity and infrastructure after a strategic review. By mid-2020, the plan, which has about 70,000 members and roughly $11 billion in assets under management, had made its first investments.

Read: 2020 Top 100 Pension Funds Report: How have Canada’s DB pensions changed over the last decade?

The PEPP’s management learned from the MEPP’s decades of experience with alternatives, which started in 2005. By 2017/18, the DB plan had reached a 20 per cent allocation in infrastructure and five per cent in private equity. Unlike the MEPP, which started with a five per cent infrastructure allocation to just two different managers, the PEPP started much more aggressively, with a planned eight per cent allocation to infrastructure and three per cent to private equity and much more diversification. Hutch noted the plan also expanded from its longstanding Canadian real estate allocation into global real estate to fill out its total alternatives exposure.

Today, the PEPP’s members can select from the plan’s steps lifecycle fund, which gradually becomes more conservative in allocations as members age, and five asset allocation funds ranging from aggressive to conservative. The PEPP also has standalone money market and bond funds that aren’t diversified.

The DC plan has 30 underlying investment mandates, broadly grouped into equity, alternatives and fixed income. Private equity falls within the equities mandate, making up just six per cent of that total bucket. While equity allocation varies in each fund option and stage of the PEPP’s steps fund, Hutch said it’s “critical” that the alternatives allocation stays relatively consistent across all fund types and that members have no option to deselect these investments if they’re in an asset allocation fund.

Read: Seeking better risk levels by adding alternatives to DC plans

“That means we can basically have a DB structure of investments and give you the same diversification, the same risk-reward, that you see in a DB plan, but . . . we can keep it simple for members. If we tried to do it without embedding it within each of these [fund] options, you’d need some kind of gates to allow members to select private equity or infrastructure directly.”

For DC plan sponsors looking to get into alternatives, Hutch said they can benefit from a subcommittee or other oversight body that can react more nimbly to investment opportunities than a board of directors can. It was something the PEPP learned from the MEPP: it took until 2012 for the DB plan to introduce an oversight body, after finding it difficult for the board of directors to meet its commitments on time. “We got them in, but it was at the last minute more often than we’d like.” 

He suggested they also consider whether to delegate searching for investment opportunities to a partner, execute internally or share in the execution. Currently, the PEBA works with consultants to find investments for both the MEPP and the PEPP. These are are exclusively limited partnership opportunities, though the funds do a certain amount of secondaries. The shared model provides the MEPP and the PEPP with ownership over the investment manager decisions while benefitting from the resources and experiences of a consultant, but “smaller plans might have to choose more of a delegated model to get into the space at all,” he noted. 

Read: How to gain exposure to alternatives through the secondaries market

Hutch also recommended that DC plan sponsors be aware that it takes roughly four to six years to reach a target alternatives allocation. They’ll also need to consider whether to make alternatives available as a standalone investment option that members can choose or integrate these allocations into existing investment options, he said. While the former approach is possible, he suggested that allowing members to enter and exit alternative investments at will could create substantial challenges for plan sponsors.

With less liquid mandates, he advised plan sponsors to consider broader allocation ranges than what they might normally target for equity and fixed income to prevent allocations from falling quickly out of compliance during a market event. “We definitely see it as a long-term investment. You don’t want to go to a secondary market to sell if you don’t have to.” 

Read more coverage of the 2022 DC Investment Forum.