From an investment strategy perspective, it has also meant constant measurement and monitoring of funding ratios. Annual tests of funding ratios – for base benefits and inflation indexing – set the framework for asset allocation, says John Sinclair, CEO of the New Brunswick Investment Management Corporation (NBIMC), which has $13 billion in assets under management, 87% of which are managed in-house. NBIMC provides investment strategy and investment services for a number of New Brunswick based public sector pension plans.
Sinclair is scheduled to speak at Canadian Investment Review’s upcoming Risk Management Conference at Fairmont Tremblant, Que., (August 10 to 12). He will lead a case study on risk management for shared-risk pension plans — he talked to us in advance of the event.
“It has certainly changed the allocation to equities, particularly market-cap based equities,” Sinclair says. But NBIMC had already been evolving to managing non-market cap public equity approaches.
“One of the things that we had done, even before these changes in the pension plans took place, involved designing minimum-volatility portfolios. We introduced minimum volatility portfolios in 2011 and have gained some pretty good risk and return experience to date.”
Compared to other public-sector pension plans, which typically aim for a 4% real return, New Brunswick’s shared risk plans target approximately 2.5%, and that also has an impact on the asset allocation.
“In terms of the traditional target benefit or the initial anticipated asset mix, it would be much more heavily weighted to fixed income versus equities and much more targeted to long-dated fixed income, almost an immunization-type approach,” Sinclair adds. However, the shift to fixed income, which also meant adding to corporate bonds, was not as drastic as might have been predicted, he says.
“Considering where markets were, and our experience with minimum volatility, we were able to look to more weighting in equity than was originally anticipated, but primarily in a heavier weighting in low-volatility equity. That would provide the same approximate risk characteristics of the initially anticipated portfolio.”
NBIMC does manage alternative assets and it’s building out its portfolio. In contrast to bigger pension plans with better access to deal flow, Sinclair says, “we probably have a higher allocation to public securities but in trying to design those public securities portfolios we use things like low-vol and a number of absolute return strategies to better match the mission or the liabilities of the plans rather than just take market-cap benchmark exposure.”
To learn more about the Risk Management Conference, please visit the conferences section of the CIR website. If you are interested in attending this event, please email Alison Webb to be considered, as limited space available.