On a Sunday in May, as European finance ministers huddled in Brussels, devising a plan to keep the Greek debt crisis from spreading, senior decision makers at the Caisse de dépôt et placement du Québec huddled in Montreal debating how to protect its depositors' money from the encroaching debacle.
Fourteen months had passed since Michael Sabia strode into the CEO's office, charged with turning around one of Quebec's key financial institutions after a series of disasters. Mr. Sabia, a manager with a reputation for cracking the whip, moved quickly to put his stamp on the organization, replacing most of the Caisse's executive team and installing new risk controls. His urgent goal: to protect the Caisse, which manages the assets of 25 provincial funds, including the Quebec Pension Plan, against the type of surprises that led to a $40-billion loss in 2008 and wiped out a quarter of its portfolio.
The first big test of Mr. Sabia's risk-reduction efforts came as Greece's debt problems threatened to drag down world markets. If the Caisse made the wrong move, it could expose itself to yet another round of devastating losses.
Over a week, as the Greek crisis unfolded, Mr. Sabia and his investment team met daily, sketching out scenarios, assigning probabilities, probing where weaknesses might lie.
"We basically lived the experience," Mr. Sabia says. "We did umpteen stress tests and asked ourselves how the portfolio would react to this, to that. Where are we overexposed, where are we underexposed?"
Poring over the results, they spotted what they believed to be opportunities to fortify their $132-billion portfolio, the largest pool of pension assets in the country. Now, on this May weekend, with Greece's fate still up in the air, it was time to make decisions.
"We took actions that, I'm never going to say insulate us or completely protect us from big market events - because you can't - but I am going to say that we took actions that meaningfully mitigate them," Mr. Sabia says.
In other words, the Caisse passed its first test under his leadership. It's just the first of many tests that lie ahead as the Caisse fights to restore its reputation and its returns.
THE PRICE OF SAFETY
Mr. Sabia's efforts to turn around the Caisse will affect the future of millions of Quebeckers, who look to the pension manager to provide them with at least a portion of their retirement income. His success, or failure, also has wider significance, pointing to the dilemma facing many pension funds as they grapple with a looming retirement crisis.
Across North America, pension funds are reaching for high returns to fulfill the promises they made years ago to future retirees. But as baby boomers start retiring, and those promises come due, pension funds find themselves in a world of low returns, with bonds generating minuscule yields and stocks well below their peaks of years past. Compounding the problem, "we're still all licking our wounds from 2008 and having to try and make up the losses that we all faced at that time," says Jim Leech, the chief executive officer of the Ontario Teachers' Pension Plan.
Many pension funds are ratcheting up risk to achieve higher returns. But the Caisse's recent history demonstrates that taking on more risk can backfire. Under Mr. Sabia's predecessors, the pension fund manager moved into derivatives, asset-backed commercial paper and currency trading, strategies that blew up during the financial crisis.
The market turmoil exposed gaps in the fund's risk management. For instance, many money managers use a yardstick called value at risk, or VAR, to assess their potential losses every day. The Caisse was measuring it only once a month.
The $40-billion loss in 2008 shattered faith in Quebec's iconic pension fund. Henri-Paul Rousseau resigned from the CEO post in mid-2008, after six years. He was replaced by Richard Guay, who lasted just months in the role before leaving, citing burnout.
Mr. Sabia, who arrived in March, 2009, is betting he can achieve both higher returns and lower risks - a mix that usually doesn't go together. His strategy is to simplify the Caisse's investments, focus the pension manager on what it does best, and institute rigorous risk controls. Given the competitive pressures of money management, he won't specify the exact moves that his team made in May, but they were part of his overall goal of reducing risk.
In many ways, Mr. Sabia is attempting to do at the Caisse what he did at BCE Inc., where he served as CEO, and at Canadian National Railway Co., where he held several senior positions. In both those cases, his primary strategy was to prune complex organizations.