The CAAT Plan's investment strategy is developed out of an asset-liability analysis and detailed risk assessment. The Plan’s $10.8 billion pension fund is well-diversified across a broad range of public and private asset classes and return sources. The guiding principles laid out in our Statement of Investment Policies and Procedures (SIPP) help ensure our assets are invested in a prudent and skillful manner, and follow the highest standards for quality, compliance and performance that will contribute to the long-term sustainability of the pension fund.
The Plan employs several strategies for managing investment risk, including diversification and liability-sensitive investing.
Diversification helps reduce the risk that certain market fluctuations and economic factors will have a negative impact on large portions of our portfolio at the same time. Asset classes that experience strong performance under certain economic conditions can balance out those with weaker performance.
Examples of diversification include:
- Asset classes (e.g. equity, fixed income, real assets and commodities)
- Regional (e.g. Canadian, global, emerging markets)
- Company type (e.g. large or small cap, public or private).
Liability-sensitive investing helps reduce risk by considering that part of the fund will behave in a similar way as the Plan’s liabilities.
The CAAT Plan's fund is divided between the following:
- "Liability sensitive" investments that are split between “interest rate sensitive” assets (such as nominal bonds) and “inflation sensitive” assets (such as real return bonds, real assets and commodities) help to hedge the interest rate and inflation and sensitivity of our liabilities.
- "Return enhancing" investments such as public and private equities are expected to grow faster than the liabilities over the long term.
Asset-Liability Modelling Study
To ensure the strategy continues to meet the needs of our membership, the Plan periodically undertakes an Asset-Liability Modelling (ALM) Study to identify the best possible asset mix for the Plan. The study takes into consideration the Plan's liabilities, risk tolerance and long-term return requirements.
Statement of Investment Policies and Procedures
The CAAT Plan's investment policies are documented in its Statement of Investment Policies and Procedures (SIPP), which serves as a blueprint for our investment strategy, outlining our investment goals, beliefs and philosophy. Among other things, the SIPP details the asset mix policy and permitted investments, as well as the long term return expectation and the Plan’s approach to responsible investment.
The SIPP also outlines the investment principles that guide the investment and risk management of the assets in the fund. These investment principles are:
To meet the goals of stable contribution rates and securing retirement income, the investment policies that govern the Fund should take into account the behaviour and sensitivities of the Plan’s liabilities.
Perfectly matching or immunizing the Plan’s liabilities is rarely achievable in practice because:
(i) Estimating the value and risk profile of the liabilities relies on many assumptions about member demographics that are altered frequently, as well as economic factors such as interest rates and inflation;
(ii) The value of the liabilities also varies with the discount rate which is in part driven by expected returns of the asset classes in the Fund and by the risk tolerance of the Plan’s governors; and
(iii) Fixed income instruments, such as long duration bonds and real return bonds, that help to hedge the economic risks, but not longevity or salary escalation risks, and may not be available in the Canadian market in the form and quantities required (although use of derivative instruments such as swaps may be of help).
Closer matching of assets to the liabilities may be achievable, but it may cause contribution rates to go above an affordable level.
Assets in the Fund are divided into three broad categories: interest rate sensitive, inflation sensitive and return enhancing.
Interest Rate Sensitive and Inflation Sensitive asset classes help to hedge the economic exposures to interest rates and inflation in the Plan’s liabilities. Return Enhancing asset classes provide the opportunity for long-term enhanced returns and diversification in managing contribution rate volatility. Several asset classes in which the Fund invests have characteristics and risk factors that fit into more than one of these categories.
The level of equity exposure will drive much of the risk level of the Fund assets relative to the liabilities and will vary depending upon the risk tolerance of the Board.
The risk tolerance of the Board will be influenced by the funded status of the Plan, as well as the priorities defined in the Funding Policy.
Strategies that access different sources of return and / or increase portfolio diversification will be pursued in the expectation of enhanced long-term risk-adjusted returns. This includes the diversification of asset classes and risks as well as the diversification of sources of added value or alpha.
While there will be periods of equity underperformance, it is expected that equity investments will outperform bond investments over the long term.
While returns associated with non-Canadian currency movements relative to the Canadian dollar are not expected to have a significant effect on the return of the CAAT Plan over the very long term, over shorter periods, currency movements may cause returns to be volatile. Hedging will be employed for certain non-Canadian currency exposures.
Active management is employed for those strategies where there is an expectation of adding value relative to a benchmark over the long term net of expenses.
All active management activities are carried out within defined parameters. Active management performance is measured against appropriate absolute or relative benchmarks and relevant asset class peer groups.
Passive investment management may be used in certain asset classes where the prospects of adding value are diminished based on market efficiency or limited opportunity or in managing the level of active risk exposures within asset classes.
While the Plan’s liabilities are long-term in nature, the requirement to file valuation results with the regulator every three years (which in turn can drive contribution levels) means the investment horizon of the Fund has to be balanced between the relatively short term and the long term. The ability to smooth asset values and to work within a range of acceptable valuation assumptions helps to extend the investment horizon of the Fund.
The long-term nature of the Plan’s liabilities allows for a material portion of the assets in the Fund to be invested in illiquid assets. Investment in illiquid assets such as infrastructure, real estate or private equity shall be implemented for those investments where there is expected to be additional return available due in part to an illiquidity premium.
Leverage, defined as the use of non-cash backed derivative instruments or borrowed capital to increase the expected rate of return received from investment activities, to manage liquidity or to manage risk, may be used in defined and controlled circumstances as permitted by applicable law and approved by the Board.
Financial assets in Canada represent a very small segment of global market capitalization and are concentrated by industry sector and geographically. While there may be reasons for the Plan to hold Canadian investments in excess of their global market weight within a particular asset class, global diversification of investments is beneficial to the Plan and will be employed.
In addition, the SIPP describes the Plan’s approach to responsible investing.
The CAAT Plan Board believes that, as part of its fiduciary duty to Plan beneficiaries, consideration of risks related to the investment of the Plan’s assets includes non-financial risks such as environmental, social and governance (ESG) factors.
In particular, the Board believes that over the long term, companies that have sound corporate governance structures and practices will outperform those that do not.
The Board believes that managing the risk to the sustainability of a corporation includes the awareness and management of the environmental and social impacts of the corporation’s business activities. Inattention to these factors can result in, among other things, reputational harm that in turn can lead to financial underperformance.
The key components of the Plan’s ESG activities are:
- CAAT is a signatory to the United Nations-supported Principles for Responsible Investment Initiative;
- The Plan’s proxy votes are cast in such a way as to encourage corporations to be environmentally and socially responsible, to adopt sound governance practices and to disclose information on ESG factors and risks;
- CAAT joins with other institutional investors in engaging with the management of corporations in which it invests to encourage better ESG practices; and
- The Fund’s investment managers are encouraged to incorporate ESG factors in their investment management processes, where appropriate to the mandate.
Download the full SIPP (PDF - November 2019)
Funding Policy at a glance
The Plan’s team of investment professionals implements the investment policies established by the Board of Trustees. The team recommends to the Board of Trustees the asset mix based on Asset-Liability Modelling studies conducted every few years. These studies test the future potential investment performance of various asset mixes and funded status and other key outcomes under a range of economic and demographic scenarios.
Asset mix aligned to liabilities
The Plan’s diversified investment portfolio falls into three broad categories: Interest-rate-sensitive, Inflation-sensitive, and Return-enhancing.
Interest-rate-sensitive and Inflation-sensitive assets help offset the sensitivities to changing interest rates and to inflation that impact the valuation of the Plan’s pension payment stream. Return-enhancing assets help the Plan meet its expected rate of return and keep contribution rates appropriate and affordable for contributing members and employers.
Because pension plans like ours have an investment time horizon that is decades into the future, they can provide stable sources of long-term capital for investments such as infrastructure, real estate and private equity.Julie Cays, Chief Investment Officer
The ultimate objective of the investment strategy is to deliver a rate of return that will fund current and future pension benefits while keeping contribution rates affordable for our members.
The CAAT Plan concluded 2019 with a total of $13.5 billion in assets, up from $10.8 billion the previous year. The fund returned 16.0%, net of investment management fees, over the one-year period, and moved the 10-year annualized rate of return net of fees to 10.0%.
More details can be found in the most recent Annual Report.
The CAAT Pension Plan takes very seriously its fiduciary responsibility to the more than 61,000 Plan members who depend on us for secure, lifetime pension benefits. The principal investment goal of the Plan is to maximize long-term, risk-adjusted returns to secure pensions.
In carrying out the Plan’s investment decisions, we are guided by the three core principles of our Responsible Investing Policy:
1. Supporting sound governance through proxy voting
2. Corporate engagement, which entails the Plan working with other institutional investors to encourage regulators and Canadian corporations to strive for more comprehensive disclosure of ESG (environmental, social, and governance) risks
3. Encouraging the integration of ESG factors in investment processes.
Ultimately, CAAT believes that companies that have sound corporate governance structures and practices will outperform those that do not, and that managing the risk to long-term shareholder return includes the awareness and management of the environmental and social impacts of a corporation’s business activities.
1. Proxy Voting
The CAAT Plan’s Responsible Investing Policy states that the Plan will vote the proxies attached to its shareholdings thoughtfully and responsibly, and that shareholder proposals dealing with ESG factors will be examined considering the effects of the proposals on shareholder value.
Votes are generally cast in favour of proposals that corporations adopt policies that embrace the International Labour Organization’s Conventions, the Ceres Principles on the Environment, and the Organisation for Economic Co-operation and Development Guidelines for Multinational Enterprises.
2. Corporate Engagement
The Plan joins with other institutional investors to encourage Canadian regulators and the management of Canadian public corporations to strive for better governance practices and more comprehensive disclosure of ESG risks. The Plan actively encourages corporations to improve disclosure on ESG factors and risks so that investors are better able to take such factors into account when looking at the risk and return prospects of investments in their portfolios.
The Plan has been a member of the Canadian Coalition for Good Governance (CCGG) since 2005. The CCGG was formed to represent the interests of institutional investors in promoting good governance practices in Canadian public companies, and to improve the regulatory environment to best align the interests of boards and management with those of their shareholders. The members of the CCGG include a range of institutional investors, such as pension plans, mutual funds, and other third-party money managers that manage approximately $4 trillion in assets.
Julie Cays, CAAT’s Chief Investment Officer, is a past Chair and current Vice-Chair of the CCGG Board of Directors, and Chair of its Governance Committee. She regularly participates in engagement meetings with directors of Canadian public corporations.
Shaping change through collaboration
Principles for Responsible Investment
The CAAT Plan is a signatory to the United Nations-supported Principles for Responsible Investment (PRI), together with more than 2,200 institutional investors from more than 50 countries. The signatories to the PRI believe that an economically efficient, sustainable global financial system will reward long-term, responsible investment and benefit the environment and society.
The CAAT Plan is a signatory to the CDP (formerly known as the Carbon Disclosure Project). The CDP acts on behalf of hundreds of institutional investors in encouraging companies around the world to disclose information on greenhouse gas emissions, water usage, and their strategies for managing climate change and deforestation risks.
The CAAT Plan is an affiliate of SHARE – the Shareholder Association for Research & Education. SHARE is a Canadian organization that works with institutional investors to promote responsible investment practices through active ownership, research, and education. In 2019, SHARE became one of the Plan’s participating employers.
Pension Investment Association of Canada (PIAC)
Members of the CAAT Plan’s investment team are active in the Pension Investment Association of Canada (PIAC), an organization focused on promoting sound investment practices and good governance for the benefit of pension plan sponsors and beneficiaries. CAAT’s Chief Investment Officer Julie Cays and Kevin Fahey, Managing Director, Investments, are both past Chairs of the PIAC Board of Directors.
Institutional Limited Partners Association (ILPA)
The Institutional Limited Partners Association (ILPA) is a global industry association composed of limited partner investors in private equity funds. CAAT is an active member of ILPA and has endorsed the association’s Private Equity Principles, which promote the alignment of interest, good governance, and transparency that form the basis of effective relationships between limited and general partners.
3. Integrating ESG factors into investment processes
As a long-term investor, the Plan encourages its investment and fund managers to integrate the consideration of ESG factors into investment decisions. This is done through the due diligence process for existing and potential managers as well as through an annual questionnaire that is sent out to the investment managers and general partners asking a series of questions about how sustainability factors are integrated into their investment processes. The Plan has tracked these responses for more than a decade and has found that investment and fund managers are increasingly considering the impact of ESG factors when making investment decisions.
The primary objective of the CAAT Pension Plan’s responsible investing activities is to assist in maximizing the Fund’s risk adjusted returns.
The CAAT Plan’s Board of Trustees believes that, over the long term, companies that have sound corporate governance structures and practices will outperform those that do not.
The Board believes that managing the risk to long-term shareholder return includes the awareness and management of the environmental and social impacts of a corporation’s business activities. Inattention to these impacts can result in, among other things, reputational harm that in turn can lead to financial underperformance.
The Board supports and encourages fair wages, benefits and working conditions for workers employed by our assets. In particular, we point to the ILO Principles addressing the right to form and join trade unions and bargain collectively and freedom for workers’ representatives from discrimination and their right to access all workplaces necessary to enable them to carry out their representation functions.
The Board recognizes the important role and contribution of public employees – and a public sector with sufficient capacity and resources – in ensuring the long-term prosperity of our society and economy.
United Nations-supported Principles for Responsible Investment (PRI) Initiative
The CAAT Plan is a signatory to the PRI Initiative, which is made up of an international network of institutional investors that are committed to incorporating responsible investment issues into their decision making and ownership practices.
One of the most important ways for the Plan to encourage corporations to be environmentally and socially responsible and to adopt sound governance practices is by using its proxy vote. The Plan or its voting service provider will:
- Vote proxies in a thoughtful, responsible manner. Shareholder proposals on environmental, social and governance (ESG) issues will be examined on a case-by-case basis taking into account the possible effects that any proposed actions would have on the long-term shareholder value of the corporation.
- Encourage disclosure by corporations on ESG factors and risks so that investors can be better informed as they do their financial and fundamental analysis.
- Vote for proposals that corporations adopt policies that embrace the following third party guidelines/ principles:
- The International Labour Organization’s Conventions
- The Ceres Principles on the Environment
- OECD Guidelines for Multinational Enterprises - General Principles
The CAAT Plan will also join with other institutional investors in engaging with the management of corporations in which it invests to encourage better environmental, social and governance practices.
- Membership in the Canadian Coalition for Good Governance
- Participation in the Pension Investment Association of Canada (PIAC)’s investor stewardship and advocacy endeavours
- Sign on to:
- CDP (carbon disclosure and water use) o Extractive Industries Transparency Initiative o Other initiatives that are consistent with the principles of this Policy and approved by the Managing Fiduciaries
Investment Managers and General Partners
In meetings with the Fund’s Investment Managers and General Partners, where appropriate to the type of mandate, the CAAT Plan will encourage the incorporation of environmental, social and governance factors into the investment management processes.
On an annual basis, Investment Managers and General Partners are asked to respond to a series of questions about how ESG issues are integrated into their investment processes.
Direct and Co-investments
In due diligence processes relating to private market direct and co-investment opportunities, the CAAT Plan will consider ESG factors in risk analysis.
Each year a report will be provided to the Investment Committee on how this Policy is incorporated into the CAAT Plan’s investment activities.
The Board of Trustees will review this policy at least once every three years to ensure that it remains relevant and appropriate.
The Board of Trustees approved this Policy on March 27, 2007.
The Board of Trustees approved an amended Policy on May 31, 2016.