The video features a discussion between Audrey and Ian, who are both heads of treasury in their respective organizations. They explain their roles and responsibilities, emphasizing the importance of capital raising and liquidity management in maintaining the pension plans they manage. Audrey represents the Ontario Teachers Pension Plan, while Ian works for CDPQ, both of which manage significant assets for public sector employees in Ontario and Quebec respectively.

The conversation shifts to the significance of bond issuances as part of the overall investment strategy for pension fund managers like CDPQ and Ontario Teachers. They explain the reasons for entering the bond market, the investor types interested in their bonds, and how these bond issuances play a crucial role in diversifying portfolios without adding risk. They cover how these initiatives provide more agility in capital deployment and risk management for their pension funds.

Main takeaways from the video:

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Key Vocabularies and Common Phrases:

1. treasury [ˈtrɛʒəri] - (noun) - The department responsible for managing the financial assets and liabilities of an organization. - Synonyms: (finance department, financial management, fiscal division)

I'm the head of treasury at the Ontario Teachers Pension Plan, responsible for all capital raising, liquidity management...

2. defined benefit pension plan [dɪˈfaɪnd ˈbɛnɪfɪt ˈpɛnʃən plæn] - (noun phrase) - A retirement plan where employee benefits are computed using a formula that considers factors like salary history and duration of employment. - Synonyms: (benefit pension plan, retirement plan, pension scheme)

So we are a defined benefit pension plan.

3. liquidity [lɪˈkwɪdəti] - (noun) - The availability of liquid assets to a market or company; how easily assets can be converted into cash. - Synonyms: (cash flow, convertibility, cash assets)

...responsible for all capital raising, liquidity management...

4. fiduciary duty [fɪˈduːʃiˌɛri ˈdjuːti] - (noun phrase) - An obligation to act in the best interest of another party. For instance, pension fund managers have a fiduciary duty to their clients. - Synonyms: (trustee responsibility, legal duty, care duty)

...we have a fiduciary duty to.

5. diversification [daɪˌvɜːrsəfɪˈkeɪʃən] - (noun) - The process of a business or organization varying its range of products or field of operation. - Synonyms: (variety, assortment, mixture)

And so diversification is a core part of how we think about that portfolio construction.

6. credit appeal [ˈkrɛdɪt əˈpiːl] - (noun phrase) - The attractiveness of a bond issue to creditors, based on factors like the creditworthiness of the issuer. - Synonyms: (creditworthiness, credit rating, financial attractiveness)

But when I take a step back and say, well, what's the credit appeal, for example, Ontario Teachers...

7. robustness [roʊˈbʌstnəs] - (noun) - The ability to withstand or overcome adverse conditions; strength or sturdiness. - Synonyms: (strength, resilience, durability)

So just that robustness from a creditor priority standpoint...

8. legislative mandate [ˈlɛdʒɪsleɪtɪv ˈmændeɪt] - (noun phrase) - A requirement established by law for an organization to perform specific activities. - Synonyms: (legal requirement, statutory obligation, mandated action)

We have an exclusive legislative mandate and we also act independently from the government

9. benchmark [ˈbɛnʧmɑːrk] - (noun) - A standard or point of reference against which things may be compared or assessed. - Synonyms: (standard, reference point, criterion)

...we tend to issue benchmark size bonds in these markets.

10. synergies [ˈsɪnərdʒiz] - (noun) - The interaction of elements that when combined produce a total effect greater than the sum of the individual elements. - Synonyms: (cooperation, collaboration, interdependence)

...really will feed into the synergies that we have from a total portfolio standpoint.

Canada’s Top Pension Funds on International Borrowing

Good morning everyone. Great to be speaking with you. Audrey and Ian, thank you for being here. Before we delve into funding requirements and bond issuances, why don't we start by you talking about your roles at your organizations. Would you like to go first, Audrey?

Sure. So I'm the head of treasury at the Ontario Teachers Pension Plan, responsible for all capital raising, liquidity management and maybe just a couple of words about Ontario teachers. So we are a defined benefit pension plan. We are responsible for investing the plan assets really to meet that pension obligation for all the public school teachers in the province of Ontario. And that's about 340,000 active and working teachers supporting that pension. We've got about 256 billion in assets under management as of June 30 this year. So really a sizable pension plan and a large accountability set. So when we think about sort of my role as head of treasury, I sit inside that Total Fund management group and I call that out because we really think about our bond issuance program and our treasury function aligned with the total portfolio, construction of the portfolio from a top down standpoint. So maybe just a bit of flavor in terms of sort of my role and how I sort of fit into the total fund.

Well, thank you for having me first. A pleasure. And yeah, similar to Audrey, I'm in charge of the treasury team. Our mission is the threefold. We develop, maintain funding programs for CDPQ. We manage liquidity reserves of CDPQs basic liquidity reserves to cover various needs including during a severe market downturn and we act as an internal banker. So we support our various business units to basically optimize their investment strategies. As for maybe a word on CDPQ, we were actually created by the government in 1965 to manage funds for public and parapublic organization in Quebec and in the province of Quebec only. So the majority of funds we manage come from pension plans of public sector employees in Quebec will be teachers, healthcare workers and public servants. And these clients of ours, we have 48 institutional clients. They are for the vast majority at least required to work with CDPQ as their sole asset manager. We have an exclusive legislative mandate and we also act independently from the government. So we were created by the government of Quebec, but we are fully independent, so there is no political influence. We work for our clients, not directly for the government.

But why do pension plans or pension fund managers such as CDPQ top the bond market? How does it fit into the overall investment strategy? Well, I think there's two main reasons. The first one is actually because these funding Programs provide more options as a large sophisticated investors. Having access to these funds allows us to diversify a little bit more our portfolio, change the asset mix to provide the optimal expected return for our clients. So it's not about increasing risk. We're not using these funding sources to add leverage on an existing portfolio. That's not it. Our clients have a specific established level of risk they want to take. That's a given. And then we use funding to optimize portfolio construction. And then the second reason is really to give us more agility in deploying capital and managing our liquidity reserve.

Yeah, so very similar I think as I mentioned, you know, at Ontario Teachers we look at the total portfolio from a top down standpoint. So we have a single client, just the school teachers in the province of Ontario that we have a fiduciary duty to. And so when we think about our portfolio, it really has a top down view in terms of, you know, what is the optimal risk reward profile we want in our portfolio. So we're looking to deliver the sufficient return to keep that pension sustainable over the long term, but with the least amount of risk as possible. And so diversification is a core part of how we think about that portfolio construction. And our bond issuance program feeds into that optimal portfolio construction. So we're able to de risk the portfolio essentially while earning that same return that we need to meet that pension obligation.

So both CDPQ and OTPP issue billions billion dollar of bonds every year. How was, how's the investor appetite for both your bonds, Audrey? Yeah, so I would say, you know, our first inaugural issuance was back in 2017 and we've been in the market annually since that point in time and our program has grown quite a bit in the last five to 10 years. And so really, you know, who's looking at our bonds? We have an abundance of central banks, official institutions, we have asset managers, institutional investors, we have bank Treasuries, just to name a few of the investors that really are underlying sort of the bond investors for our program. But when I take a step back and say, well, what's the credit appeal, for example, Ontario Teachers, you know, at the core of it, at the front end, the creditor priority sits with bondholders first and foremost. So when you think just about creditor priority from a default standpoint, the bondholders stand way ahead of the pensioners. And so that's a part of the design. So just that robustness from a creditor priority standpoint, like Ian said, Ontario Teachers is also an independent organization. So Ontario government is one of the plan sponsors to the plan. The Ontario Teachers Federation is the other plan sponsor. But we operate by design. We were set up to be completely independent and so we're overseeing the portfolio. We're overseeing really how to invest to meet those pension obligations. And so that independence really sort of feeds into it as well. When I take a step back, we're also really overseen by an independent board. That sort of really comes back to that independence function. And so when you think about good governance, good risk management, really in the vein of sort of delivering against that pension promise, there's a robustness in the funding side from a pension plan standpoint, but then also from just an investment management standpoint and just a sizable pool of assets that really backstop that as well.

Ian, would you like to tell us about. Well, I won't repeat everything what Audrey said because we have obviously similarities. At the end of the day, I think we offer exceptional value for investors. I may be a little bit biased, but not that much. I think we've been rated AAA from the beginning of our first issuances back in the early 2000s. But we launched our current funding program in 2019 and we were able to, as Audrey mentioned, we were able to expand our investor base. We now have a pretty well diversified investor base across investor type across region. That's because investors recognize that value and that triple A rating again similar to Ontario teachers. There's of course like structural legal reasons, legal protections for senior creditors, priority of claim for senior creditors, independence from the government as well. And for us one key aspect, obviously as an asset manager we're not a pension plan per se, we're an asset manager. But our clients have an exclusive legislated obligation to invest their fund with cdpq. So that's the legal structural part. And of course we operate in a very stable legal environment in Canada. And as for the more financial coverage of things, we will always maintain a very low level of senior leverage. Today we have roughly something around 8% of our assets that are funded with our senior program. Of course the vast majority is funded with our clients capital. So that coverage will stay at a very high level at all time. And there's also the quality and liquidity of that coverage. So we have a very well diversified portfolio across asset classes, across regions and there is a significant portion of that portfolio that is maintained in very liquid assets that, that summarize roughly why, why we, I think we offer exceptional value for investors.

Audrey, can you talk a bit about the core strategy around issuances for Ontario teachers And what markets do you usually tap? Yeah, so as I mentioned, as we think about the total portfolio, so the issuance sort of feeds into the portfolio construction. It also sort of will feed into how we think about currency management as well as interest rate management. So as we look at that total portfolio approach, the bond issuance sort of feeds into that. So we get a value in terms of certain currency hedging properties as well as interest rate standpoint. But I say when we think about sort of going to the market, you know, we've built out a curve in the US dollar. That was the first market that we sort of built out our curve and then we moved into the euro market. So we're really a global investor. That's, that is supported through a global issuance program as well. More recently we've put our focus into Canada. And so we think about sort of the areas of our focus. It's about being a regular issue in these markets and having a presence in the US Euro as well as Canada on the margin. There's also the sterling market where we have issued bonds as well as the potential for Australian dollar as well. And when I think about sort of how we think about our bonds, we do issue conventional bonds as well as green bonds. We do have four green bonds outstanding, two in the European market and two in Canadian dollars. Roughly speaking, as I think about sort of just broadly, we tend to issue benchmark size bonds in these markets. We really looking to the primary market to provide liquidity to our investors. And so we tend in each of the markets issue in that benchmark size form.

What markets do you focus on? Well, it's not too dissimilar to Ontario teachers. We launched our funding program in 2019 and it was clear for us that we, we had to focus on core markets to make sure we develop a large investor base and commit to these markets with regular benchmark issuances and provide predictability and stability to investors and building liquidity and the proper yield curve. So that meant for us maintaining that focus. So that would be mainly the US Dollar market, Canadian dollar market and the euro market. That's, that's the main focus. That does not mean that we will not issue in other currencies. Of course, diversification of investors is very important. So whether it's Australian dollar or sterling, for example, that's the things we will look at and we will grow obviously. So with that growth comes a need to continue looking at other markets. So that would say that's the main part of our core strategy and we'll Keep again as a long term objective, the market itself. We're not arbitrageurs, we're not looking at making the last basis point when we issue that. We're really looking at things with a long term view.

There was a notable surge in bond issuances this year. In general, OTPP raised around 3 billion. Canadian CDPQ raised around 4 billion USD. Both are a bit lower than last year. Why is that for cdpq? Well, if I speak for cdpq, well yes, you're right, we issued a little less than last year. If you look at the last three years, we're pretty stable. I forgot to mention that we have a target that is roughly around 6 billion of issuance a year. That's in US dollars, that's an average. Obviously we'll have to issue more or less depending on their circumstances. But 6 billion is our target. So we've issued around that amount in the last three years. But it really depends on the circumstances. If you look at the general pension issuer space, again you'll see a lot of stability in the last three years, something around 25 billions of issuance. And I'm not very surprised to see that stability because we share common goals, we 1 commit to investors with stability and regular issuances and we use funding as a long term strategic tool. So that's why I think you should expect that stability on this market.

Yeah, I would say for Ontario teachers is probably in line. I would say when we started the program and in 2020 and 2021 we would have, you know, we've done a larger amount of issuance, really starting up that program and really maturing it and building out the curves in the multiple markets as I mentioned. And so where we are today is more in that mature phase. And so I think what you'll start to see to Ian's point is just more stability in terms of our issuance patterns and what we do anticipate on a go forward basis. The one thing to note is that on any one year it might have been flow a little bit. And from the Ontario teachers perspective that will be a function of sort of how the portfolio needs change. And we do an annual exercise really to review what is the capital envelope that is required for the investment program on a go forward basis. And so you might see a little bit of ebb and flow. But definitely we have mature programs now in place and there is a desire to sort of constantly be in the market in sort of maintaining those programs.

How do interest rates movements impact your funding needs, particularly as the Federal Reserve moved from hiking to cutting. I think sample answer for me will be not much because our funding needs are again a long term strategic tool for us and our clients have a long term investment horizon. So the trajectory of interest rates will not significantly impact in the foreseeable future, at least the funding needs. Of course that will impact if there's high volatility that can impact investors appetite and impact our. I mean our timing of issuance obviously. But from a strategic standpoint I don't expect much impact there.

Audrey, what considerations do you have for maturity choices and currency mix? So as I mentioned, we are a global investor and we have a global portfolio. And so that will feed into sort of the desired currencies that we would want to issue in as well. And there's a natural currency hedge that comes with issuing globally because we do have that natural currency exposure which has a value proposition for us internally even though the market might not see that. And so that will, that will feed into sort of how we think about it. But fundamentally, you know, we have three core markets that we want to have a presence in. The US dollar Euro and cad. And so we will take that into account as a part of our funding plans to ensure that we are in the primary market in these markets to really provide that primary liquidity for investors. That said, market pricing does feed into the ultimate decision and market conditions at the time will feed into that. But as we to sort of take that longer term view in terms of how we want to access the market, it really will feed into the synergies that we have from a total portfolio standpoint as well as just from the benefits that we have to be in those markets just to ensure that we have that presence.

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