Canada’s largest public pensions — unofficially called the “Maple 8” — are internationally respected and in a healthy fiscal position at the end of 2024 [1]. These eight public pensions collectively hold $2.1 trillion in assets under management as of the end of 2023. Despite recent economic headwinds, the Maple 8 are in a strong financial position with almost all members of this unofficial group above 100% funding. In fact, by 2023, Canada Pension Plan (CPP) Fund assets were $200 billion above projections, creating predictable benefits payouts for the next 75 years.

The formation and rise of the Maple 8 traces back to reforms in the late 1990s and early 2000s aimed at improving the management and performance of Canada’s public pension funds. These reforms included independent governance, professional management of the funds and retention of top talent, diversification of investment portfolios, and a greater emphasis on direct investment and international opportunities. Academics and the World Bank have studied these reforms’ success, and the California Public Employees Retirement System (CalPERS) has worked to replicate it [2,3,4].

However, sectoral, national, and international factors have changed from the context of the late 1990s reforms. We are now in an era of exponential risk, where previously unconsidered risks compound. For Canada’s public pensions, this means navigating inflation, interest rates, major geopolitical realignments, and the impact of climate change. In addition to these risks, despite the current funding security, an aging Canadian demographic will place pressure on balancing funding revenue and payout.

However, there are opportunities amid the risk. Based on Maple 8 annual reports, opportunities include private equity, private debt, real estate, credit, natural resources, fixed income, and green investments.

To leverage these opportunities and mitigate risks effectively, it is crucial for the Maple 8 and other public pensions to adopt innovative investment strategies and leverage data and tools that can provide a competitive edge. Moody’s provides the solutions needed to give pension plans a 360-degree view of risk, covering all asset classes from structured finance through commercial real estate and all major sources of risk such as credit, climate change, cyber, and market risk. These tools are not just for public pensions at the Maple 8’s scale. The availability of the tools can also provide a pathway for smaller public pensions to chart a similar growth path while effectively managing the new risks that have emerged in recent years.

Risk management

In September, the Canadian Association of Pension Supervisory Authorities (CAPSA) issued its “Guideline for Risk Management for Plan Administrators.” The guideline is intended for all pension plan administrators, including the Maple 8, and encourages good practices such as plans creating a risk management framework to identify, evaluate, manage, and monitor material risks; regularly review risk frameworks; and adapt risk management to reflect a plan’s specific circumstances and risk.

Moody’s solutions, such as PFaroe DB, can help pension plans adopt the guideline’s good practices in several ways, including simultaneous viewing of valuations and risk analysis; what-if scenario testing to help assess the impact of different economic conditions and investment strategies on pension plans; customizable metrics, such as investment trigger notifications and detailed risk summaries; and client-ready report creation and continuous monitoring of risk attributes.

In addition to the CAPSA guidelines, in their annual reports and public statements Maple 8 executives have emphasized that they need a forward-looking perspective on risk management, not just historical data. Relying solely on historical data for management may not provide a complete or accurate picture of future risks and opportunities and may also limit pension managers’ ability to identify new associations and correlations that could be crucial for risk management and investment decisions.

In public statements and surveys, Maple 8 executives have stated that to improve risk management, they are considering new technologies and advanced analytics, which many believe are currently being underused. They believe these tools can make the industry less dependent on historical data and provide huge opportunities to determine associations and correlations that were not previously known. They see potential applications for artificial intelligence in alpha-generation, total fund management, risk management, and trading.

Moody’s solutions and data can support pensions seeking to build out their predictive analytics capabilities at the micro and macro levels.

At the micro level, Moody’s EDF-X™ can help users monitor if a company can meet its financial obligations with advance notice and take action. EDF-X provides an Early Warning Signal powered by an extensive database of company information and award-winning models. The Early Warning Signal considers all relevant recent performance indicators including market, financial, and alternative data signals, which capture both systemic and idiosyncratic sources or vulnerabilities that could affect the company’s ability to meet its current and future obligations.

At the macro level, Moody’s Economic Scenarios provide users with a deeper understanding of how each country’s economy will fare, and Scenario Studio allows them to produce custom scenarios using Moody’s global macroeconomic model. Moody’s updates its forecasts monthly, providing a 30-year horizon. Backed by our expert economists and a fully validated model methodology, pensions can leverage Moody’s global economics to better understand the economies that impact their portfolios.

Alternative investments and private markets

Canadian public pensions have diversified so heavily into private markets and alternative investments that they might not even be considered alternative anymore.

A challenge of private markets has been how opaque they were to investors due to a lack of data. To address this barrier, Moody’s has partnered with several alternative investment managers to form a data alliance. This alliance allows for the measurement of risk-based performance and a better understanding of both investmentperformance and its associated risks.

Moody’s Structured Finance Solutions can offer invaluable insights and tools to Canada’s public pensions to help them navigate the complexities and specific risks of alternative investments, including the scenario analyses and stress testing tools noted above.

Private equity investments’ inherent complexity often involves structured financial products. Through structured finance solutions, Moody’s dissects these products to identify risk layers and understand the mechanisms designed to mitigate or transfer these risks. This includes a detailed analysis of the tranches within structured products, providing insights into the risk exposure and potential returns for the pension funds involved. Consequently, this analytical approach aids in crafting a more informed investment strategy tailored to withstand various market conditions.

Real estate

Commercial real estate has been a key component of Maple 8 portfolios since the late 1990s. The Ontario Teachers’ Pension Plan (OTPP)owns Cadillac Fairview, the Canada Pension Plan Investment Board (CPPIB) owns Oxford Properties, and the Caisse de dépôt et placement du Québec (CDPQ) owned and has now fully absorbed Ivanhoé Cambridge. In addition to these real estate management arms, Maple 8 pensions also have their own inhouse commercial real estate management.

However, the commercial real estate space for offices has been in flux since Covid-19 given that many office employees moved to remote work. In addition, interest rates rose across the globe, impacting property yields and values. Once globally envied for their commercial real estate holdings, the Maple 8 pensions saw heavy losses in 2023, including a 5% loss by the CPPIB, and a 16% loss by the Public Sector Pension Investment (PSP). The losses have led to the public pensions reorganizing their operations to streamline real estate investing and management.

While interest rates have started to come down and more employers are enforcing return-to-work orders, commercial real estate (CRE) is still a volatile market. Moody’s CRE offers tools for property performance forecasting and stress testing, which can help navigate this volatility. These tools help real estate lenders and investors, including public pension funds, model credit risk within their portfolios more accurately. Moody’s CRE also provides submarket data and macro scenarios that can be incorporated into CRE credit risk calculations, creating stronger, more accurate models. These scenarios can help pension funds create more robust forecasts and net operating income (NOI) simulations for their loan portfolios under a variety of conditions. Additionally, Moody’s CRE can ingest macroeconomic scenarios provided by the public pension funds and translate them into commercial real estate market impacts. This can provide scenario-specific value and NOI forecasts, as well as probability of default (PD), loss given default (LGD), exclusive agency listing (EL), implied rating results, loss provisions, and risk-adjusted yield.

Most importantly, Moody’s portfolio management platform can incorporate additional Moody’s data such as tenant credit, physical climate risk, and borrower risk — including legal actions and watchlists — as well as adverse media monitoring to look for space added to sublease markets or other negative events.

Climate

The impact of climate change weighs on the Maple 8’s decisions in terms of risk to their investments as well as their own responsibility as influential global citizens. In 2020, the Maple 8 pensions’ CEOs signed a joint letter calling for sustainable and inclusive post-Covid-19 economic recovery. The letter emphasizes the need for improved environmental, social, and governance (ESG) reporting from companies and investors, which includes the Maple 8.

The Maple 8 letter frames ESG in terms of risks to investments. With Moody’s Climate on Demand Pro, pensions can analyze physical risk for sites and locations to quantify present-day and long-term climate risks for portfolio management, understand property threats and combined risks across the portfolio, and measure potential financial costs for investment due diligence. For the Maple 8’s sizable CRE investments specifically, Commercial Mortgage Metrics (CMM) is the leading analytical tool for combining property performance forecasts. Using property and climate data for Canada, the United States, and Europe, CMM applies climate risks to forecasts of vacancy, rent, return on investment, and value.

In addition to physical asset risk analysis, Moody’s Climate Pathways and Macroeconomic Climate Scenarios — based on Network for Greening the Financial System (NGFS) and other regulatory scenarios — provide a comprehensive framework for assessing the potential impact of different climate scenarios on economic and financial variables. This can help the Maple 8 and other public pensions better understand and manage the potential risks and opportunities associated with climate change in their investment portfolios. Furthermore, Moody’s EDF-X provides climate-adjusted PD measures for corporate investments, allowing pensions to map temperature and emissions pathways to credit risk for corporations.

At a policy level, Moody’s is also helping Canada set a standard for climate change impact on stress testing. The Office of the Superintendent of Financial Institutions (OSFI) uses Moody’s EDF-X for its Standardized Climate Scenario Exercise (SCSE).  The SCSE is intended to encourage regulated financial institutions to consider risk discrimination under future climate scenarios. While the OSFI is not a public pension regulator, the industry uses its guidance papers, and several federal Crown corporations have opted in to the exercise.
 

Read more @moodys