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Comparing the Asset Allocation of Large Pension Funds

Before making the decision to take the commuted value of our defined benefit pension plan, I did a little digging into how pensions invest and their asset allocation. Ever wonder how the big billion dollar pension funds are allocating their funds to ensure long-term sustainability?

RelatedHow and why asset allocation works

At a high level, most pension funds follow a low-fee indexed approach with global coverage.  Some funds may have a higher home bias than others, but the general formula is the same as what most bloggers would preach as a properly diversified indexed portfolio.  That is an allocation of equities in Canada, U.S, and international; an allocation of bonds and other fixed income like mortgages; and real estate.

For further diversification (and alpha), most larger funds also hold private equity.  An interesting pattern that I’ve noticed is that the bigger the fund, the larger the allocation to private equity.

Here are some examples of large pension funds in Canada and their asset allocation:

NL Public Service Pension Plan (PSPP)

In NL, we have a PSPP which is the largest defined benefit pension plan in NL.  I’m currently contributing to this fund during my remaining time with government.

As of December 31, 2016.

Fund Size: $8B

Asset Mix:

  • 51.4% Equity;  38.4% Fixed Income; 10.2% Real Assets
  • Canadian Equity: 21.2%
  • US Equity: 15%
  • EAFE (international) Equity: 11.2%
  • Emerging Market Equity: 3.7%
  • Fixed/Plus/Global Bonds: 36.7%
  • Real Estate: 3.1%
  • Infrastructure: 7.1%

Alberta PSPP

As of December 31, 2016.

Fund Size: $11.9B

Asset Mix:

  • 57.5% Equity; 21% Fixed Income; 20.8% Real Assets; Strategic Opportunities: 0.8%
  • Canadian Equity: 14.1%
  • US/EAFE  Equity: 35.7%
  • Emerging Market Equity: 4.9%
  • Private Equity: 2.8%
  • Fixed/Plus/Global Bonds/Mortgages: 21.0%
  • Real Estate: 13.9%
  • Infrastructure: 6.9%
  • Strategic Opportunities and Hedging: 0.8%

Ontario Pension Board

As of December 31, 2016.

Fund Size: $24.4B

Asset Mix:

  • 51.5% Equity; 25.4% Fixed Income; 23.1% Real Assets 
  • Canadian Equity: 9.2%
  • US/EAFE/Emerging Equity: 33.1%
  • Private Equity: 3.9%
  • Fixed/Plus/Global Bonds/Mortgages: 30.5%
  • Real Estate: 18%
  • Infrastructure: 5.1%
  • Strategic Opportunities and Hedging: 0.2%

British Columbia PSPP

As of March 31, 2016.

Fund Size: $26.28B

Asset Mix:

  • 55.9% Equity; 20.2% Fixed Income; 22.6% Real Assets; Other: 1.3% 
  • Canadian Equity: 12.1%
  • US/EAFE Equity: 30.8%
  • Emerging Equity: 6.8%
  • Private Equity: 6.2%
  • Fixed/Plus/Global Bonds/Mortgages: 20.2%
  • Real Estate: 14.6%
  • Infrastructure: 8.0%
  • Strategic Opportunities and Hedging: 1.3%

Canada PSPP

As of March 31, 2016.

Fund Size: $91.75B

Asset Mix:

  • 34.5% Equity; 32.6% Fixed Income; 27.7% Real Assets; 5.2 % Alternative 
  • Canadian Equity: 5%
  • US/EAFE/Emerging Equity: 20.6%
  • Private Equity: 8.9%
  • Fixed/Plus/Global Bonds/Mortgages: 32.6%
  • Real Estate: 17.8%
  • Infrastructure and Natural Resources: 9.9%
  • Strategic Opportunities and Hedging: 5.2%

Canada Pension Plan (CPP)

This is a monster fund and is in the top 10 largest pension funds in the world.  If you are a salaried employee, you are contributing to this fund whether you like it or not!  The bright side is that this fund is healthy and focused on the long term.  Another interesting note is that this fund takes private equity to the next level.

As of March 31, 2017.

Fund Size: $316.7B

Asset Mix:

  • 55.4% Equity; 21.5% Fixed Income; 23.1% Real Assets
  • Canadian Equity: 3.3%
  • US/EAFE Equity: 27.9%
  • Emerging  Equity: 5.7%
  • Private Equity: 18.5%
  • Fixed/Plus/Global Bonds/Mortgages/Credit: 21.5%
  • Real Estate: 12.6%
  • Infrastructure and other real assets: 10.5%

 Final Thoughts

I hope that this summary gives you some ideas for your own long-term portfolio and additional confidence in the value of asset allocation and diversification.  After all, these funds are faced with the pressure of providing thousands (even millions) of people with a secure retirement now and in the decades to come.

For further reading on this topic:

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 11 comments… add one }
  • Leo Ly @ isaved5K.com October 30, 2017, 9:58 am

    Wow, I am really surprised that the CPP, the largest Canadian pension fund, only have 3.3% of their money invested in Canada. I know that the percentage is close that what Canada’s share of the global economy, but how about the confidence to invest in your own country?

    Another curious question that I have, with so much foreign equity holdings, I wonder if the CPP’s foreign income gets taxed heavily or they don’t get taxed at all?

    • FT FT October 30, 2017, 8:06 pm

      That’s a good question Leo about the tax implications. I’m going to dig a little further into the annual report.

  • Ms99to1percent October 30, 2017, 9:58 am

    Good post and research FT. I need to bookmark this ?.

    Question, do you have any single stocks in your portfolio?

    Once we pay off our mortgage a couple years from now and can afford to gamble with a little bit of money, we plan to invest in some single stocks.

  • Bryan October 30, 2017, 7:03 pm

    I did some digging into my DB plan. The benchmark for 800M is:
    20% Cad equities
    17.5% US equities
    17.5% international equities
    5% private equity
    10 % real estate
    15% Cad fixed income
    6% mortgages
    9% private debt / private infrastructure debt.

    It makes you realize when people retire and go all fixed income that they are probably underestimating how much growth they are going to need in retirement. Last 5 years of returns have been 7.7%, 6.5%, 10.2%, 19.6%, 11.4%, which isn’t horrible considering how poorly the CAD market has done since late 2014.

    • FT FT October 30, 2017, 8:02 pm

      Thanks for the information Bryan!

  • SST November 1, 2017, 11:13 pm

    re: “I hope that this summary gives you some ideas for your own long-term portfolio…”

    Individuals should *NEVER* model their own portfolios after any institutional fund.

    For one thing, every individual has a terminal date; institutional funds do not. For another, every individual will have life events peppered throughout their life — children, retirement, buying a house, etc. — which will require different things from their portfolio ; an institutional fund has exactly one function and never deviates from its role.

    re: I wonder if the CPP’s foreign income gets taxed heavily or they don’t get taxed at all?”

    They do get taxed, but it’s much closer to “they don’t get taxed at all” than “taxed heavily” (yet another reason why individuals/households should never model institutional). Just read any of their annual reports to find the numbers.

    Ciao.

  • GYM November 3, 2017, 3:03 am

    Wow, I am also surprised that the CPP pension fund has so little invested in Canada! It’s a little ironic, don’t you think (quoting Alanis Morrisette)?

    Also I didn’t know that CPP is one of the top 10 largest funds in the world, interesting!

  • dividendgeek November 4, 2017, 10:18 pm

    My two cents
    1) I believe US stock markets have given the best ROI, even considering the tax losses?
    2) Investing in Canadian stocks (majority) would lead to reduced diversification … high exposure to energy, finance and metals …. Perhaps the strategy is to diversify across assets.

  • Matt November 7, 2017, 9:24 am

    I’m a little surprised that none of these funds hold any gold???

  • Danny November 16, 2017, 2:00 pm

    While it is interesting to see that most pension funds are more aggressive than people would realize, it’s important to note that their allocation is constrained by two large factors. The first is simple, money in and out. If current contributions to a pension plan are higher than current outward obligations, the pension plan will be able to move it’s targets for equity based on being in a position where annual net contributions are positive (basically a savings stage).

    The 2nd is far more complicated. Essentially pensions are tested regularly by actuaries to see if they are considered funded, and indicate what percentage they are currently funded. This is done by creating a model where the pension is considered to be “wound up” meaning no new obligations created (other than the future obligations of people who have contributed, but not yet retired), and no new contributions to the plan. Basically testing to see what percentage of the current promises of income the pension could substantiate with it’s current funds. This takes into consideration several key pieces of informaiton. Average expected return, average expected life expectancy of the individuals and a monte-carlo simulation with a failure barrier. Since the fund would essentially only have money withdrawn, it’s not good enough to just take the anticipated returns of each asset class and assume that a straight line compounded return will be accurate in determining the longevity of the fund. Instead, a monte-carlo simulation is used based on the standard deviation of each asset class(and tons of other factors). This essentially goes through simulations of different distributions of market conditions and some other risk factors. This means that it comes up with a maximum standard deviation that would be acceptable for the fund, which means that underfunded pensions need to balance the standard deviation with maximizing the return so they can bring the fund back in line. Thankfully, companies that back pensions are now given stricter guidelines in bringing pensions to fully funded status (I think 97% funded and above is considered fully funded), as there are a ton of pensions out there that would just limp on indefinitely as underfunded as the companies would rather give them an IOU rather than actual money, especially if the company is struggling **Cough Cough** Sears ** Cough. These changes in regulations will create some volatility as it increases companies liability to these funds in the short term, so many will make changes to the fund going forward (higher contribution rates, later retirement dates etc), and some are abandoning them completely for Defined Contribution Plans and are just going to fund up the Pension and cut their loses.

    I think I went off on a tangent, but my point is that there is a lot that goes in to determining the asset allocation of a pension plan, and while it’s very different than the personal scenario, I do think it’s worth thinking about parallels , and if there are there things that you aren’t considering. Have you thought much about how standard deviation effects the probability of success when you start withdrawing? Have you thought about Longevity Risk? These items might help determine your asset allocation today. For instance, given that no portfolio with equity is 100% guaranteed by anybody, the idea that a portfolio that has 50% equity during the saving years could create a retirement income plan that has a higher probability of failure later might put your interpretation of risk into a different context.

    It’s an interesting topic of discussion.

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