Report sees pension solvency at 15-year-high; Liquor Stores meet capital needs

By some measures the Canadian economy is humming along at levels not seen in many decades: For example, the unemployment rate, which was 5.7 per cent at the end of 2017, is now at its lowest since 1976.

The good times have extended to those Canadians fortunate enough to have a defined benefit pension plan.

The reason is higher interest rates, which from the perspective of a defined benefit plan are attractive because they lower the value of its liabilities. So with liabilities rising at a lower rate and with healthy equity markets improving the fund’s asset base, the gap between the two narrows.

The ideal combination is when rising bond yields decrease pension liabilities, but in such a way that they more than offset the impact of negative bond returns on median solvency.

Over the past few months that combination has been at work as the gap between assets and liabilities has narrowed so much that there are more assets per dollar of liabilities than in the past. At least that’s the conclusion from a report last month by AON Canada.

According to the report, median pension solvency (which stood at 101.3 per cent on Jan. 31) was the highest since 2002. Last October, the solvency ratio was 100.7 per cent, the previous post-global financial crisis record.

Aon’s Median Solvency Ratio survey “tracks the performance of Aon Hewitt-administered defined benefit pension plans from the public, semi-public and private sectors.” It is an average and it follows that some funds will have solvency ratios above that average while others will have ratios that are lower than the average.

But before everybody gets too pleased, AON added a note of caution, noting the rising rate environment “has created a simultaneous bond and equity selloff, and if that gains traction, the impact on pensions’ financial health could be severe.”

Against such an environment, AON advises for plan sponsors who might have been considering ways to mitigate risk and better diversify that “now is the time to take action if there ever was one.”

Liquor stores

Eight months back, a group of dissidents led by PointNorth Capital, staged a proxy contest against Liquor Stores NA.

Their campaign was based around the theme that Liquor Stores can do better. They put forward a seven-point plan, none of it that radical. In essence it planned some changes around inventory management (where it figured it could save $80 million over two years) and around achieving other efficiencies. It was all part of a plan by the company to invest $40 million in its core Canadian market. Shareholders liked it so much that six of PointNorth Capital’s nominees were named to the board prior to the meeting.

It’s highly unlikely PointNorth Capital or its nominees thought they would now be welcoming a major new long-term shareholder, Aurora Cannabis, which agreed Monday to acquire a 19.9 per cent stake in Liquor Stores that could rise to 40 per cent.

Aurora will pay $298 million (in total, if everything works out) in cash and is buying its stake at a healthy premium to the market. Aurora is making its investment in two stages: $103.5 million now and the rest in stages, some of which requires shareholder approval.

The financing package also includes warrants, which if exercised, would raise a further $160 million. Some of the initial proceeds will be used “to establish and launch a leading brand of cannabis retail outlets,” while the rest will be used to renovate existing liquor store outlets.

In a note Russell Stanley, an analyst at Echelon Wealth Partners, described the transaction as “probably the strongest vertical integration move we have seen a cannabis company undertake.”

Financial Post

bcritchley@postmedia.com

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