Worst case portfolio keeps HOOPP on track

The enviable surplus of the $47.4 billion Healthcare of Ontario Pension Plan, HOOPP, is down to a key focus on what David Long, senior vice president and co-chief investment officer at the fund, attributes to a “single strategic objective:” namely to pay benefits at a reasonable cost to the fund’s 247,000 workers in Ontario’s hospital and community-based healthcare sector.

It’s a mission informed by maintaining returns (17 per cent last year) but also keeping to within what he calls “maximum limits” of the impact of any potential losses on the funding status of the plan.

Speaking at the Conexus Financial annual Fiduciary Investors Symposium in Amsterdam, Long explains that the funded ratio of the pension fund is dictated by the expected return on assets.

“The higher the expected return, the higher the funded ratio,” he says.

The fund also puts together a worst case funded ratio where it simulates in stress tests how things going wrong in the financial world – from inflation to nominal interest rates or equity volatility – would impact the funding ratio negatively. “Apply extreme market movements to assets and liability to find out how they would be affected,” he says.

For HOOPP, the worst case funded ratio would be for the plan to be underfunded between 80 and 100 per cent, with any dip towards 80 per cent entering what he calls a red zone.

“We don’t want to go below 80 per cent,” he says, explaining that in this scenario a “vicious” spiral effect means pressure on risk and better returns increases, while all the time the ability of the fund to withstand loss shrinks. “You want to stay out of this zone.”

In contrast, a green zone – “a great place to be” – shows a balance between controlling risk and maintaining return. Here the funded status hovers between 110 per cent funded and, in a worst case scenario, 80 per cent underfunded. But a fund in surplus can also promise challenges for “intergenerational equity”, in which the scheme is obliged to distribute money back to beneficiaries. The “ideal” is a blue zone, “a happy medium” between being in no real danger of being either underfunded or overfunded.