A bad bet on fluctuating oil prices cost Alberta’s public pension funds more than C$4 billion last month, after the Alberta Investment Management Corporation (AIMCo) bought into a collection of contracts that never paid off in a stock market upended by falling oil prices and the global pandemic.
The revelation in the Globe and Mail came just as Progress Alberta reported that AIMCo lost millions more on $1.1 billion in investments in smaller oil and gas companies, at a time when the province’s fossil sector was in decline.
A $4-billion loss “would equate to more than a third of AIMCo’s 2019 net investment income of $11.5 billion,” the Globe and Mail reports. The Progress Alberta report concludes that “of the $406 million invested under the Alberta Growth Mandate, nearly $270 million—two-thirds—went to the [fossil] energy sector,” The Canadian Press adds.
Out of 32 investments aimed at supporting new jobs, infrastructure, and industries under the previous NDP government, “five were in real estate, one in agriculture, and one in renewable energy. The rest were in oil and gas and all have lost value.”
AIMCO controls about $118 billion in assets on behalf of 31 pension, endowment, and government funds with 375,000 Albertans as members, including the province’s $18-billion Heritage Savings Trust Fund.
But the agency “lost billions of dollars when the economic collapse wrought by COVID-19 sent the S&P 500 and other stock benchmarks on a roller coaster ride, putting it on the losing end of the trades,” the Globe says, citing senior pension plan officials and other unnamed contacts. “The sources said that AIMCo now acknowledges its executives were not fully aware of the risks they were taking.”
While AIMCo “told clients in early April it is terminating the money-losing approach.,” some of the contracts won’t be off the books until June.
The financial hit “came on top of a sharp drop in the value of its traditional equity, bond, and real estate investments in March, when virtually every investor lost money,” the paper adds. “The average Canadian pension plan lost 8.7% of its value in the first three months of this year.” But “when it formally reports quarterly results to clients later this month, AIMCo is expected to be down far more.”
AIMCo’s investment pool includes $50 billion held by the Edmonton-based Local Authorities Pension Plan (LAPP) on behalf of 275,000 Alberta hospital workers and current or retired government employees. A Globe follow-up has a list of all the major funds involved.
“We have heard from AIMCo, in a preliminary reporting, that the first-quarter report is likely to show significant losses as a result of the severe market volatility that characterized the first few months of 2020, in reaction to COVID-19,” LAPP Vice-President Sheri Wright told the Globe. “AIMCo is fully aware, and we communicate to them on a regular basis, that our risk tolerances are as much a reflection of our pension obligations as the need for positive investment gains.”
Medicine Hat City Controller Dennis Egert, with $150 million in play, was more forgiving. “We appreciate the unique COVID-19 impact on the financial markets,” he told the paper in an email. “However, we also appreciate the nature and behaviours of the capital markets.”
The Progress Alberta study looked at $1.1 billion AIMCo had poured into junior and intermediate fossils, many of them already in tenuous financial shape, since 2016. “The vast majority of them were in really rough shape before the crisis,” said executive director and report co-author Duncan Kinney.
At least one of those companies, Trident Exploration, went bust after chewing through $60 million in pension dollars, CP writes. “Others have had to renegotiate their debt. Others, such as Pieridae Energy, in which AIMCo has invested $120 million in debt and equity, are high-risk investments, says the report.” And “many have large environmental liabilities that can no longer be shuffled off in bankruptcy due to a recent Supreme Court of Canada ruling.”
AIMCo CEO Kevin Uebelein has said the agency enjoys a “home field advantage” that enables it to find good investments in Alberta where others can’t, CP says. But “Kinney disputes that. He pointed out that AIMCo has consistently failed to meet targets for returns set by one of its largest clients,” LAPP. “Kinney also questions the agency’s independence from government,” noting that AIMCo—unlike the Canada Pension Plan—is subject to what CP calls “significant influence” by provincial politicians.
Kinney added that several of the corporate recipients of AIMCo’s generosity were supporters of Jason Kenney’s United Conservative Party government. “Those companies are in the tank for UCP,” he told CP. “The links are troubling.”
“AIMCo operates at arm’s length from the government, on commercial terms and with complete operational independence, in particular as it relates to investment decisions, and always in the best interests of clients,” responded spokesperson Denes Nemeth. “There is absolutely no merit to the suggestion that AIMCo selects investments on the basis of what political party a particular company may support.”