Canadian pension plans are among the most admired
institutional investors for their prowess as money managers.
Now pension plans in Canada are upping the ante, increasingly
issuing long-term bonds and using the borrowed money, or
leverage, to try and generate even better returns, a new report
Much of the money raised will back private equity investments, a big source
of outperformance for the top-ten Canadian pension plans,
according to a research report on pension plan debt issuance
that will be released this week by capital markets technology
firm Overbond. The company is an electronic platform for
primary bond issuance, directly connecting issuers with
On the back of their huge private equity businesses,
Canadian pension plans have become debt issuers
themselves, says Vuk Magdelinic, CEO of Overbond.
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According to the report, Canadian pension plans are taking
advantage of their strong long-term track records and high
credit ratings to issue debt at low rates. The report is based
on interviews with institutional investors and data from the
Overbond platform. The platform allows issuers to identify
potential bond buyers, as well as benchmark and price
The plans want to lever up, but not at all
costs, says Magdelinic. One such recent deal: AIMCo
Realty Investors, a division of Alberta Investment Management
Co., issued C$400 million ($327 million) in seven-year senior
unsecured notes on June 26th.
Plans are using borrowed money to try and counter the
pressure from the falling number of active workers that are
supporting their retirees. Institutional investors,
particularly corporate pensions, have been eager to buy bonds
issued by the Canadians.
The market is hungry for new bonds, and this is a
quality type of issuer, says Magdelinic. Financing
private equity through the bond market is an efficient form of
Issuing bonds is not the only way institutional investors
can leverage their portfolios. They can also directly invest in
hedge funds and other vehicles that use complex
All but one of the top-ten Canadian pension plans have more
than 20 percent of their portfolios in private equity, an
allocation that has contributed to excess returns over the past
ten years, according to the Overbond report. Ontario
Teachers Pension Plan, for one, has a whopping 46 percent
of its portfolio in private equity.
In order to fund more PE acquisitions and maintain
high returns, pension plans are more inclined to issue
long-term debt securities, write the reports
authors. Eight of the top-ten Canadian pension plans have
issued debt, with $32 billion currently outstanding, or 2
percent of their combined assets.
Five-year annualized returns for the top-ten Canadian funds
hover around 10 percent, compared with the 2 percent generated
by the S&P TSX Total Returns index. Still, many Canadian
pension funds need more. They have to support a growing number
of retiring baby boomers through longer life spans than
At the same time, fewer workers, who pay into the pension
system with each paycheck, are joining the public sector than
are retiring, putting more pressure on other income sources.
According to the report, OMERS, the Ontario pension for
municipal workers, had nine active employees for every retiree
in 1976, four in 1986, and less than two active workers per
retiree in 2016.
Canadian public pensions are issuing debt to increase
returns, even as corporate pensions are selling bonds to fill
funding holes. In July, Kroger, the U.S. supermarket chain,
issued debt to help the underfunding of its pension plan, while
FedEx did the same in January.