Anyone who knows a little bit about investing and related strategies knows that it’s very beneficial to have a diversified portfolio. This helps reduce risk while maximizing long term returns. Anything from various combinations of stocks, bonds, real estate, to cash holdings, etc. The point is to not have all your eggs in one basket, lest the basket breaks and all your eggs get cracked.
The same could be said of pension plans. But how do you know what those plans are investing in? It’s never in their news letter. It’s not directly on their main website pages. You have to dig a little, and even then, it’s somewhat murky.
What You’re Really Made Of (Hint: it’s not clarity)
With HOOPP, to answer that question, you have to go find their annual report on their investments page to figure out their investment profile. The annual report is a very large PDF document with lots of fancy jargon, pie charts and numbers. Most people likely will never bother to look for it, much less read through its entirety.
After a bit of digging through the report, you’ll eventually encounter their “Investments” section. As far as diversity goes, HOOPP seems to be quite well covered. They have things like the following in their investment profile:
Short-term bonds, nominal bonds, real return bonds, real estate, public equities, private equities, Canadian and Foreign Currencies and Investments, derivatives, commercial loans, private assets, cash, etc.
The majority of their investments also seem to be done in the form of various index market fund investment classes. Ie: Canadian equities (TSX), US equities
(S & P 500), etc. One of the benefits of having index funds for investments is that they are relatively cheap from an expense fee view (ie: 0.3%), compared to traditional mutual funds (ie: ~2.0%). So far so good?
What I had difficutly finding was the exact percentage ratio of all the various investment categories. So, out of all of HOOPPs investments, how much were composed of stocks, how much were composed of bonds, etc. What they did have was a chart on all of their investments’ fair value and cost (in Millions).
What I roughly calculated this out to was the following:
Their bond component would make up ~ 52%, Stocks and Real Estate about 40%, and the remainder 8% as “alternative” investments. I wish it was clearer, especially for your average HOOPP member to figure out.
Depending on how you choose to classify certain investment classifications, the percentages may be a bit different.
Does HOOPP invest well? Can You Do It Better?
But the point here is to figure out HOOPP’s asset allocation as best we can so we can get a descent comparison done. In 2020, they were close to a 50/50 bonds/stock combo and obtained an investment return of 11.47%.
In 2021, they achieved a return of 11.28%.
Also, HOOPP notes their 10yr average annual return (from 2021) of 11.06% and 20yr return of 9.52%
If you were thinking about investing for retirement on your own, a big question you might have is “Can I do as well as HOOPP did?”. Because those returns are generally considered quite good overall.
First, I want you to have a look at HOOPP compared to other common pensions funds (Data as of Dec/Mar 31, 2021).
| Pension Fund | 1 Year Return | 10 Year Return |
| CPP | 20.4% | 10.8% |
| CDPQ | 13.5% | 9.6% |
| Ontario Teachers’ | 11.1% | 9.3% |
| PSP | 18.4% | 8.9% |
| BCI | 16.5% | 9% |
| AIMCo | 14.7% | 8.6% |
| OMERS | 15.7% | 8% |
| HOOPP | 11.28% | 11.06% |
Compared to the other pensions, HOOPP had the second lowest 1 year return for 2021. Uh oh. That’s not good, right? Yet, over the past 10 years, HOOPP averaged the higherst return out of all the pensions. The reason why pensions’ returns differ so dramatically is that they each have their own investing philosophy and strategies that will produce different results in different time periods.
But getting back to the DIY approach, have a look at the chart below, where we compare HOOPP’s returns to several other returns of various investment portfolios composed of relatively generic asset mixes.
*The World Cap/Market Cap weight is based on VTWIX ratios (Total world stock index fund) and composed of:
-US: 60%
-CAD: ~3%
-International Developed Markets: ~27%
-Emerging Markets: ~10%?
The point of this chart is to show that there are many ways to skin a cat.
There are a few interesting items I’d like to point out in that chart.
It’s important to note that with investing in general, the shorter the time horizon the more variability there will be in returns. And the longer the horizon, the closer that different portfolios’ average returns will likely be to each other. This can be seen in the 2021 returns of not only the previously listed pension funds, but also of the DIY portfolio examples, where the returns varied widely. Then at the 10 year mark, and more notably at 20 years, the average returns become closer and closer together.
I do find it interesting that HOOPP does seem to think quite highly of it’s 1 year return of 11.28%, considering that it was trounced by almost all the other pensions, as well as the DIY portfolios.
At the 10 year mark, while HOOPP does edge out the competing pensions, the majority of the DIY portfolios still beat it for returns, and in some cases, significantly.
Reaching the 20 year mark is where a lot of converging happens. HOOPP does appear to come out on top over all the DIY examples, but a few of them still perform nearly identical to HOOPP, namely the 100% US and 100% CAD stock portfolios. Ultimately, in regards to investing potential, it’s stocks that drive growth in the long term, over other tools like bonds or cash.
Does this mean that HOOPP is better at investing long term than anyone else? No. It’s just one snapshot out of many that we could look at and just a few portfolio combinations out of many. It’s also important to note that past results do not guarantee future returns.
But as you can see, it’s very possible to achieve a relatively comparable HOOPP level of return with different strategies. Setting up a diversified portfolio like HOOPP, is in fact super simple and easy. You don’t even need to buy a whole bunch of different funds these days to diversify. There are options out there that combine everything together, essentially a “fund of funds”, like Vanguard’s VEQT ETF, or even other one stop options like Target Retirement Funds.
A Couple Common Curious Rules
Investing isn’t hard. It definately isn’t rocket science. However, this whole thing reminds me of a couple of common rules that we should keep in mind here.
One rule with investing is that you should only invest in what you understand. So when HOOPP has tons of different types of “advanced” investments like stock options, derivatives and whatever the “inversions” are, unless you know what all these investment class types are, you as the employee/pensioner are putting a lot of faith into the pension company to be able to successfully invest for you and your future. You better hope they know what they’re doing!
Another common rule of investing is that the more complicated your investments become, the lower the returns. There are multiple reasons supporting this theory, such as increased transaction fees due to higher frequency of trading, potential tax consequences, and the itch to make more “active” versus “passive” investment decisions. But personal investing does not at all need to be as complicated as HOOPP does it to get HOOPP level returns, as we discovered in that chart above.
Pension Raises?
Also of a curious note, if HOOPP’s annual return is really good, like ~11% per year good, why aren’t pension payments themselves increasing that much per year? Or even a more modest 5% per year?
Now, HOOPP does provide Cost of Living Adjustment (COLA) increases to pensions each year, but these are not guaranteed. Since 2014 they have been able to provide a COLA that matches the annual Consumer Price Index (CPI), which is a measure of inflation.
However, the average of the last 10 years of CPI increases works out to pension increases of ~1.83%/yr; this is a far cry from their 10 and 20 yr avg. returns of ~11% and ~9.5% respectively. And this doesn’t mean that HOOPP has to increase their total pension benefits outlay by that amount, because COLA only applies to members already receiving pension; not to members still working.
Current pension contributors do on occasion get future pension benefit increases when and if HOOPP decides to dole them out. These are more rare than COLA improvements. And they are a bit more complex to figure out than a basic COLA increase because there are usually specific requirements and working timelines to qualify for them (we’ll get there, don’t worry).
So, what happens to the remaining ~10% of HOOPP’s investment return??? That’s a good question. In general, it gets bank rolled. HOOPP does currently (as of Dec 2021) have ~$114 Billion of net assets. The also have “pension obligations” which they are supposed to be able to meet, currently worth ~$86 billion.
This doesn’t mean that they’re actually paying $86 billion per year in pension payments. “Pension Obligations” mean that if HOOPP suddenly shut down their operations, they would have to pay out the entire present/future value of all their members’ pension amounts ($~86 Billion). We’ll get into the specifics of this later on. But for now, what you need to know is that HOOPP’s pension obligations from the year before (2020) was ~$80 Billion. So their total obligations increased by 7.5%. Yet when we work that in to their overall $114 Billion net worth, that 7.5% is really closer to only a ~5.7% increase.
But again, remember HOOPP isn’t paying out any of that $86 Billion this year or any year in the future for that matter. So the 5.7% is only just an “on paper” number, and thus isn’t really subtracted from their “net assets” amount or 11.28% investment return amount. Even if we went down this hypothetical route and shut down HOOPP today, that’s a big, massive $28 billion dollars of leftover cash just sitting there. That’s a lot of extra money that’s not going to members.
Fees
Most investments have some sort of fee attached to them, whether it’s stocks, mutual funds, bonds, etc. There are even fees for making transactions such as buying and selling these items yourself, or even to a financial advisor or broker if you have one. It’s not uncommon for many mutual funds to charge as much as 2% or more in fees (*Hint: don’t buy mutual funds!). These can really eat into your returns.
HOOPP is no exception to fees, since they have expenses required to run the company and pay people there to make the investment planning, choices and decisions on where the company direction should go. HOOPP’s Management Expense Ratio (MER) fees are fairly low, all things considered. The Fraser Institute compared it with some other big pension plans.
From their 2016 report, HOOPP hovered just above the 0.30% MER range between 2011-2014.
HOOPP was also the lowest among other comparable plans. In their 2020 annual report, the MER had increased slightly up to 0.40%. If you are doing your own personal investing with index funds, using general DIY strategies mentioned in the chart earlier (ie: VEQT), your MER range would likely reach lower than that, maybe even 0.20% or below depending on which index funds were used. It’s not necessarily a huge difference, but ultimately works out to a fee cost of $200-$400 per year for every $100,000 invested. The point being that it’s totally possible to have low MER fees like HOOPP has if you’re investing on your own. DIY investing doesn’t (and shouldn’t) be an expensive endeavor.
While perhaps not officially considered as a “Fee”, there are what I would call secret underlying costs to having a pension. I will not getting into these here, but just as a heads up of what’s to come. And these secret costs by far eclipse the purported low MER fees advertised as one of the major benefits of HOOPP.
CEO Compensation
A couple years ago, there was a big provincial political campaign issue regarding the amount of money that the CEO of Hydro One (Ontario’s main electrical supplier) was getting paid. It was ~$6 million per year. That’s a fair bit. And once that was spread all over the news, you can imagine the political outrage.
It was seen as a large waste of public spending without value because of the seemingly ever increasing electricity costs to tax payers. The opposition party leader promised to fire this CEO, dubbing him the “6 million dollar man“. This led in part to a massive fallout of the public with the political party in power at the time. That party took the fall for this and it was one of the notable reasons that they were ultimately ousted from power.
CEO’s in any organization generally make a lot more than your average worker. This is fact. Some argue that you have to pay a lot to “attract the best”, and to get the best performance for a company. The CEOs at the local hospitals around here get paid in the range of $400,000 to $800,000.
In light of clarity regarding public tax dollars, Ontario puts out a legislated annual “Sunshine List”, whereby publicly funded companies are required to disclose any employee that makes over $100,000 per year. The CEO of our Nuclear Power Plants for example topped the 2021 list with over $1.6 million in compensation.
What about pension CEO’s? Well, the Ontario Teachers’ Pension Plan (OTPP) discloses their executives’ salaries in their annual report, likely because they are in part funded by the Ontario government. The current OTPP CEO makes ~$5.1 Million. Wow! Nice! And the CEO from 2013 (Jim Leech) was paid $7.4 million! That’s equivalent to over $9 million today! That’s them tax dollars at work! And we still have massive education system issues and pay inequalities among educational workers…
What about HOOPP? Whoops… They don’t list theirs. I wonder why not? Could it be because they’re a private company? Or could it be because they get paid even more than the OTPP CEO? Perhaps it’s an embarrassingly large amount. Maybe it’s 2 million. Maybe it’s 5 million… Maybe even 10+ million? I know it’s sure as heck not listed in their annual reports! Or anywhere else that I could find for that matter! Juxtaposed with HOOPP’s stated average new pension amount of ~$29k/year, do any of those numbers cause you to feel a bit of rage?
Either way. I don’t like it. It’s not transparent. And I think it should be. I want to know where my contributions are going and if the head honcho is feasting lavishly on them! Listen. Here’s my reasoning. Remember what I said about the Sunshine List? Health care workers contribute to HOOPP. Health care workers’ salary comes from the government. The government’s funds comes from taxpayers… HENCE, HOOPP is sort of publicly funded! AND, I want transparency! So this bothers me a lot. Like, if everyone was so enraged that the Hydro One CEO was making millions, where is the concern regarding pension fund executives?! Where is the outrage!?
Wrapping up
So where are we currently? Well, figuring out a pension’s investment portfolio gets a bit hazy for the average lay person. Luckily for that lay person, is not very difficult to actually match HOOPP’s investment returns if you were to DIY invest, especially on a longer horizon. There’s also the concern of where goes all the extra income that HOOPP makes? A little bit makes it back to members, but that leaves a lot left over which doesn’t.
And, while HOOPP may have fairly low MER fees compared to other possible investments, there is something lurking deeper in this that we’ll uncover later on. And last but not least, there’s the question of how much does HOOPP’s top executives actually make? All of this points to a general lack of clarity, which I’m not fond of. However, don’t worry. It only gets deeper and darker from here!
