Healthcare of Ontario Pension Plan credits low risks for strong year

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The pension plan for Ontario health-care workers earned an industry-leading 18-per-cent return last year despite market turmoil and falling oil prices, saying its low-risk investment strategy paid off in a high-risk market.

The Healthcare of Ontario Pension Plan (HOOPP) said it earned a 17.7-per-cent return on its investment portfolio in 2014, propelling its total assets to $60.8-billion from $51.6-billion a year earlier. HOOPP said its pension plan has a substantial surplus, with assets now equal to 115 per cent of its estimated liability for providing pensions to members.

HOOPP chief executive officer Jim Keohane said the return in 2014 was the largest the fund has earned in a single year since 1991, when HOOPP's portfolio was just one-tenth the size it is today. He said the gains are the result of an investment strategy the fund adopted in recent years known as liability-driven investing, which includes investing and hedging strategies to shelter the plan from volatility in long-term interest rates.

HOOPP invests heavily in long-term government bonds and inflation-linked real-return bonds, which earned returns of 30 per cent and 13 per cent respectively last year. Although there was a drop in long-term interest rates in 2014, which increased the funding liability facing pension plans, Mr. Keohane said HOOPP's bond-portfolio gains offset the increase in liabilities.

"Despite the major risk factor working against us, we've been able to increase our funding surplus to 115 per cent, and we remain fully funded," he told reporters Wednesday. "That's a very gratifying outcome, given what went on. A very major risk factor went against us this year, and it could have resulted in a very significant decline in our funded ratio."

HOOPP, which invests pension money for 295,000 health-care workers and retirees, has not changed its contribution rates for members since 2004, while some other public sector pension plans have had large contribution increases.

The fund also said it is restoring full inflation indexation to pension benefits for retirees because of its funding position. Inflation indexation was reduced to 75 per cent in 2002 when HOOPP had a deficit, but the fund now can afford to fully index-pension benefits to inflation in 2015, Mr. Keohane said.

The improvement will also be applied retroactively to 2002 for retired plan members, who will receive special payments to recoup any additional pension amounts they would have received if indexation had been at 100 per cent since 2002.

HOOPP's 2014 investment returns have pushed its five-year compound return to 13.8 per cent, while its 10-year return has hit 10.27 per cent. Mr. Keohane said HOOPP is leading the world with its returns, posting the highest 10-year return of any pension fund monitored by global pension data firm CEM Benchmarking.

He said the plan's funding surplus is a regulatory calculation based on a five-year "smoothing" calculation allowed under accounting rules. If the fund's additional $7-billion reserve was applied immediately instead of being smoothed over time, HOOPP would be 130-per-cent funded.