National
Pension Hub

We strive to offer local pension design insights as well as globally-relevant pension investment and governance research to establish Canada as a source for leading pension research.

Impact & Use of Leverage


Pension funds are increasingly employing leverage within their portfolios. In Canada, for one, the nation’s six biggest pension funds saw an increase in average leverage from 19% in 2009 to 24% in 2017. Common sources of leverage include the use of derivative-based investment strategies, and fixed-income investments financed through the repo market, while less common examples include the use of synthetic equity or synthetic credit strategies.

Leverage-based investment strategies, when utilized correctly, can improve pension funds’ asset liability management by reducing asset liability mismatches (hedging) or improving the risk/return trade off. At the same time, however, these strategies can increase pension funds’ exposure to macroeconomic shocks and consequent fluctuations in available market liquidity.


TOPICS:

Impacts of Leverage on Risk Taking
Optimal Leverage Ratio
Impact of Taxation on Pension Fund Leverage


Leverage to Meet the Pension Promise

This article discusses use of leverage in the context of defined benefit pension plan investment. It defines the term leverage, discusses how leverage creates value using a simple one-period model and stylized market assumptions, examines risks associated with using leverage and reviews methods and best practices to mitigate and manage these risks.