Liquidity status is helping some of Canada’s biggest pension funds meet the challenges of a volatile investment market thanks to exceptional liquidity status, according to a new report by Fitch Ratings Inc.
The report, which compared the credit ratings and portfolios of seven of the largest Canadian pension funds with approximately $2.1 trillion in net assets under management, as at Dec. 31, 2023, found a majority have sufficient liquid assets to repay all outstanding debt. Equities and investment grade bonds were excluded from the core liquidity measures due to volatility.
Read: Canadian pension funds make top 10 list for largest annualized 10-year returns: report
“The exceptionally strong liquidity of the funds provide sufficient cushion to absorb investment volatility and gives them flexibility to work through troubled investments as they are not forced sellers of assets,” said Dafina Dunmore, senior director at Fitch Ratings, in a press release.
Overall, seven Canadian pension funds were reviewed for the report. The Caisse de dépôt et placement du Québec, the Ontario Municipal Employees’ Retirement System and the Public Sector Pension Investment Board all received a AAA rating and a stable outlook from the credit rating agency. The Alberta Investment Management Corp., the British Columbia Investment Management Corp., the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan all went unrated in the report.
The OMERS and the Caisse were also rated as the funds with the strongest liquidity coverage from the pack, while the CPPIB and the PSP had the lowest liquidity coverage ratios of the peer group. However, this was somewhat offset by their above average net contributions and reduced reliance on investment income to meet their pension obligations.
The report said investment organizations are strategically re-allocating inflows and sale proceeds to government bonds due to the ongoing higher-for-longer interest rate environment.
Read: Four Canadian pension funds increasing exposure to private credit: report
The report noted it expects to keep seeing losses in real estate, particularly as refinancing requirements continue to mount in 2024 and 2025. At the end of 2023, the OMERS (55 per cent) and the Ontario Teachers’ (52 per cent) had the highest exposure to private equity, real estate and infrastructure in the aggregate.
While Fitch Ratings hasn’t recognized widespread private credit losses, the report noted, defaults are likely to increase in the rest of 2024 and 2025 because of higher debt service burdens for underlying borrowers and slowing growth.
“Pension funds that invest directly in private credit will be put to the test with respect to their workout capabilities,” Dunmore said.
It also found pension funds were largely net sellers of private equity assets in 2023, after becoming overallocated to the asset class, following several years of increasing allocations and strong returns. While further reductions to private equity are expected, Fitch’s report noted funds are expected to continue to be long-term investors in private assets.
The near-term results of pension funds will be challenged by increased cost of debt and anticipated slower growth weigh on private asset valuations, the report noted. The value of the net assets for these investors increased eight per cent year-over-year thanks to contributions and investment returns. The report found that Canadian pension funds are geographically diversified across the U.S., Canada and western Europe with no significant exposure to China. It noted a potential area of expansion in certain high growth Asian and Latin American markets.
Read: Commercial real estate challenges forcing Canadian pension funds to re-evaluate strategy: report