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Healthcare of Ontario Pension Plan president and CEO Jim Keohane is seen in his Toronto office in this 2012 file photo.Kevin Van Paassen/The Globe and Mail

The Healthcare of Ontario Pension Plan (HOOPP) posted investment returns of 8.6 per cent last year, below the industry average but enough to fatten even further its already significant surplus.

The pension fund, which represents 286,000 members working within the province's health-care sector, had a funding ratio of 114 per cent at the end of 2013, meaning it has more assets than it would need to pay all of its pension obligations if it were wrapped up immediately.

"It gives you a lot of safety in the pension plan, so if 2008 happened again we'd still be fully funded," said Jim Keohane, chief executive officer of HOOPP, in an interview. "It gives you a real cushion for problems down the road, which will inevitably happen again."

Many Canadian pension plans made major investment gains in 2013, as stronger global equity markets helped make up for the low interest rates that have persisted in recent years. Plans earned an average of 14 per cent on their investments last year, according to RBC Investor & Treasury Services.

HOOPP's net assets reached a record high of $51.6-billion at the end of the year, but its latest annual results fall short of its 2012 performance, when the plan posted a 17-per-cent return – its best results in more than a decade.

The drop in returns can be attributed to the plan's liability-driven investment (LDI) strategy, which focuses on matching the plan's assets with its future liabilities in a way that reduces volatility and risk. To meet that goal, the plan owns a hefty amount of long-term bonds, but holds fewer equities. It also uses complex derivatives strategies to enhance returns.

Since rising interest rates caused bond prices to fall last year, the plan's returns were lower than previous years. Meanwhile, strong stock market performance benefited HOOPP's peers that hold more equities.

The average Canadian pension plan was more than 99-per-cent funded at the end of last year, according to a report by consulting firm Mercer. That was a major improvement from a year earlier, when 60 per cent of pension plans were less than 80-per-cent funded. Mercer forecast that more strong investment gains this year could vault many funds into surplus status.

While HOOPP didn't benefit as much as some of its peers from big stock market gains, the funded status of the plan rose as much in 2013 as during the year prior, when its investment returns were much stronger. That's because rising interest rates caused the present value of the pension plan's liabilities to decline.

HOOPP said its annual rate of return has averaged 9.7 per cent over the past 10 years. It is off to a good start this year, but it's too soon to predict how 2014 will turn out, Mr. Keohane said.

Right now, HOOPP's managers are cautious about investing in equities, which Mr. Keohane said appear to be expensive in general. "Valuations drive a lot of what we do, and valuations are the highest we've seen since 2007," he said of the global markets. "Risk premiums, in general, are getting pretty skinny."

Its emphasis on buying assets at the right price has kept the fund from investing in infrastructure, which has been an area of increasing focus for other pension funds and asset managers in recent years. Mr. Keohane doesn't rule out infrastructure investment, but said the price would have to be right for him to tie up money in these illiquid assets.

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