A diversified approach
Diversification is an important investment tool for managing risk. A mix of assets helps the board secure the basic pension for every member.
An updated asset mix
In 2018, the board decided to adjust the plan’s long-term policy asset mix to increase the likelihood of meeting key investment objectives. The changes included the following:
Continued increase in real assets
Real assets are tangible, physical assets like land, buildings, regulated utilities and renewable resources. They suit the long-term financial objectives of pension plans because they usually provide reliable cash flows and have the potential to appreciate in value and protect against inflation.
Shift to more fixed income assets
Fixed income assets involve lending money to governments and companies in return for principal and interest payments. Similar to real assets, fixed income assets usually provide stable and reliable cash flows, which are well suited for the plan’s predictable benefit payments. Credit strategies such as corporate bonds and private debt were also approved. These involve lending to companies and providing higher return potential than government bonds.
Overall decrease in public equities
Equities are investments in company stocks. Although equities have the potential for high growth, they also can experience greater fluctuations in returns. Decreasing these investments in favour of more stable assets reduces the plan’s volatility.
Approving the use of leverage at the plan level
The careful use of leverage allows the plan to take advantage of favourable borrowing costs and invest in assets that diversify the portfolio and protect against downturns. Many of the plan’s investments already include leverage within individual investments. For example, real estate assets like commercial buildings are often purchased using leverage commonly referred to as a mortgage.