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Leverage is the Key to Meeting Canada’s Pension Promise

Contributed to The Globe and Mail:
Alex LaPlante, Managing Director, Research, GRI & Serguei Zernov, Special Advisor, GRI

According to Statistics Canada, almost 5,000 baby boomers are retiring every week. Providing pensions for this cohort has many pension managers using leverage to improve investment performance. As the bull market enters its 10th year, people are starting to worry about leverage.

The Bank of Canada recently noted that the “explosion of global debt is creating vulnerabilities in the world’s financial system.” Joining the chorus is Moody’s, which recently raised questions regarding the potential impact of the current economic environment and the use of leverage on the creditworthiness of Canadian public pension plans. For many pension plan managers, however, leverage is essential to delivering the pension promise.

Investors have been operating in a chronic low-interest rate environment since the financial crisis and have had to look for opportunities to generate higher yield, and pension funds are no exception. While using leverage requires advanced knowledge of the theory and practice of investments, pension plans with investment management sophistication can benefit from leverage in strategic asset allocation.