There has been concern about some investment strategies within the Universities Academic Pension Plan (UAPP), and its financial status. As you know, the UAPP is the pension plan for the University of Alberta, University of Calgary, University of Lethbridge, Athabasca University, and the Banff Centre, with representatives from all of these organizations on the two committees (Plan Sponsors and Board of Trustees). Aditya Kaul is AASUA's UAPP Trustee and Donna Wilson is AASUA’s representative as one of the Plan Sponsors under the Sponsorship and Trust Agreement. Gitta Kulczycki, VP: Finance & Administration at the University of Alberta, is the University of Alberta’s Trustee on the UAPP’s Board of Trustees and is the employer’s representative as one of the Plan Sponsors.
Please read this message from Aditya Kaul and Donna Wilson to AASUA members:
Dear President Kane,
AIMCo, one of UAPP’s investment managers, has recently been the subject of unflattering articles about its financial performance.
UAPP investments are made to balance risk and return with the goal of generating sufficient funds to cover future pension payments to retired members. The result is a portfolio that is diversified across asset classes (stocks, fixed income and alternatives) and across managers (AIMCo and external fixed income managers). UAPP’s Board of Trustees monitors all its investment managers (including AIMCo) quarterly to assess whether they should continue managing a portion of the UAPP portfolio.
In Q1 2020, AIMCo posted a disappointing return of –14.68%. This included losses estimated at $2.1b on a volatility strategy called VOLTS—AIMCo says that this figure will not change materially once VOLTS is completely unwound. UAPP has asked AIMCo questions about VOLTS and their other investments, and we are awaiting answers to some of these questions. At this point, our information is incomplete.
What we do know is that equity markets all over the world fell sharply in the first quarter of 2020, by between 13% and 20%, in response to COVID-19. These sharp drops contributed to AIMCo’s poor Q1 performance. AIMCo reports that the VOLTS strategy earned money for UAPP and other clients over the six previous years—from strategy inception through the end of 2019—with outperformance of 7.6% per year relative to its benchmark (a standard yardstick used to measure investment performance). These positive returns serve to soften the blow associated with the recent losses.
AIMCo’s past returns per year (net of fees) at the end of December 2019 have been 14.57% (1 Year), 6.51% (2 Years), 8.50% (4 Years), and 9.41% (10 Years). These numbers point to decent longer-term investment performance, especially in comparison to UAPP’s discount rate of 5.46% (which measures the rate of return expected on UAPP’s investments and is used in the actuarial valuation of the plan).
AIMCo’s portfolio holdings do not appear to be unduly weighted towards energy stocks. As of December 31, 2019, AIMCo had an energy exposure of 16.5% in its Canadian equity fund versus exposure of 17.0% in its benchmark (the S&P/TSX Composite Index), and 4.5% in its Global equity fund versus benchmark (MSCI World Index) exposure of 4.9%. AIMCo’s investments in renewable infrastructure energy projects, while still small, have tripled since 2018.
AIMCo’s board has launched a review of AIMCo’s risk controls, processes and strategies. AIMCo’s poor Q1 performance will be part of UAPP’s next review. The two UAPP committees will weigh the results of this review and those of AIMCo’s review before making decisions regarding UAPP’s investment allocations.
The Q1 losses notwithstanding, the funded status of UAPP is healthy (82% for the entire fund and 95% for the post-1991 component). UAPP provides its members with guaranteed and known pensions, and by law must meet its accumulated pension obligations. Therefore, members have no reason to fear that their pension benefits are at risk. For some perspective, in the aftermath of the 2008 financial crisis, the UAPP portfolio return was –20.4%, and its funded status deteriorated from 82% to 61%. Yet, UAPP recovered from that setback and plan benefits were not curtailed. While UAPP is taking the recent losses seriously and is closely monitoring the situation, UAPP’s Board of Trustees believes that there is no need for any knee-jerk reactions or panic.