Key Takeaways
- • Air Canada's eight defined benefit pension plans, which held a $2.6 billion deficit when Vincent Morin joined the airline's investment division in 2009, were at least 100 per cent funded on a solvency basis as of year-end 2019, according to Benefits Canada.
- • The investment team shifted the plans from a 60/40 equity-bond portfolio managed externally to a liability-driven strategy with 87.5 per cent fixed income, alternatives, and a hedge fund program.
- • Trans-Canada Capital Inc. (TCC), launched in 2019, now offers two fixed income and two hedge fund strategies to outside institutional investors, with $2 billion invested in external hedge funds and $1 billion in its internal strategy.
- • The plans, valued at about $21 billion and with roughly 60 per cent of liabilities tied to retirees, are weighing annuitization through an Air Canada life insurance subsidiary that has applied to OSFI for approval.
Summary
According to Benefits Canada, Air Canada's eight defined benefit pension plans, which buy units of a single master trust fund, faced a $2.6 billion deficit in 2009 when Vincent Morin joined the airline as vice-president of asset allocation and strategy. The deficit grew to $4.2 billion by 2012. As of year-end 2019, all Canadian plans were at least 100 per cent funded on a solvency basis. Morin said the mandate was to build a strategy focused on liability-driven investing and reduce pension risk, which had become a major enterprise risk management issue for the airline.
The investment team executed the turnaround through roughly 30 incremental steps. The portfolio, which was originally 60 per cent equities and 40 per cent bonds managed externally, added fixed income exposure, built an alternative portfolio of real estate, infrastructure, private equity and private debt, and implemented a portable alpha, or hedge fund, program. The fund currently holds 87.5 per cent fixed income, 10 per cent equities, 20 per cent alternatives and 10 per cent hedge funds, totalling more than 100 per cent because of leverage. Morin said the fixed income book has added more than one per cent in active value on average over a 10-year period.
To open the capabilities to outside investors, Air Canada moved the team into Trans-Canada Capital Inc., which continues to manage pension assets while offering certain funds to other institutions. TCC's internal hedge fund, launched in February 2019, began as a tactical asset allocation book using options, volatility contracts and over-the-counter derivatives. In September 2019, TCC launched a fund of hedge funds, repackaging the 10 per cent external hedge fund allocation for outside clients. Morin said the strategy is market agnostic and aims for no correlation with equity markets.
The plans are maturing, with about 60 per cent of liabilities tied to retirees and DB plans largely closed to new entrants. Morin said that at some point it will make sense to lock in benefits rather than continue taking risk. Air Canada has applied to OSFI to launch a life insurance subsidiary to purchase annuities, with TCC managing its assets alongside the pension assets. Morin noted that the plans' size, with payouts above $750 million annually two years earlier, could make full annuitization difficult, citing limited fixed income supply, though he believes the structure will yield better pricing. Benefits Canada cited Willis Towers Watson data showing Canada's group annuity market reached $5.2 billion in sales in 2019, up from $4.6 billion in 2018.
The investment team executed the turnaround through roughly 30 incremental steps. The portfolio, which was originally 60 per cent equities and 40 per cent bonds managed externally, added fixed income exposure, built an alternative portfolio of real estate, infrastructure, private equity and private debt, and implemented a portable alpha, or hedge fund, program. The fund currently holds 87.5 per cent fixed income, 10 per cent equities, 20 per cent alternatives and 10 per cent hedge funds, totalling more than 100 per cent because of leverage. Morin said the fixed income book has added more than one per cent in active value on average over a 10-year period.
To open the capabilities to outside investors, Air Canada moved the team into Trans-Canada Capital Inc., which continues to manage pension assets while offering certain funds to other institutions. TCC's internal hedge fund, launched in February 2019, began as a tactical asset allocation book using options, volatility contracts and over-the-counter derivatives. In September 2019, TCC launched a fund of hedge funds, repackaging the 10 per cent external hedge fund allocation for outside clients. Morin said the strategy is market agnostic and aims for no correlation with equity markets.
The plans are maturing, with about 60 per cent of liabilities tied to retirees and DB plans largely closed to new entrants. Morin said that at some point it will make sense to lock in benefits rather than continue taking risk. Air Canada has applied to OSFI to launch a life insurance subsidiary to purchase annuities, with TCC managing its assets alongside the pension assets. Morin noted that the plans' size, with payouts above $750 million annually two years earlier, could make full annuitization difficult, citing limited fixed income supply, though he believes the structure will yield better pricing. Benefits Canada cited Willis Towers Watson data showing Canada's group annuity market reached $5.2 billion in sales in 2019, up from $4.6 billion in 2018.
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