The following update has been prepared at March 23, 2023 by the Western Investment Team on behalf of the Joint Pension Board to provide important context about current volatility in the banking industry and its minimal impact on Western’s Pension Plans. There is no action required of plan members.

You have most likely heard about the recent volatility in the banking industry. More specifically, earlier this month, two U.S. banks, SVB Financial and Signature Bank, became insolvent. A third one, First Republic Bank, is also in financial distress. Eleven U.S. financial institutions have announced that they would deposit US$30 billion into First Republic to help that bank remain solvent. However, from March 8 to March 22, First Republic’s stock price fell by 88 per cent. Finally, Credit Suisse, a Switzerland based financial institution, was forced to merge with UBS on March 19. As a result of that forced merger, approximately US$17 billion of Additional Tier 1 (AT1) debt was completely written off.

What are the implications for Western’s Pension Plans?

The negative impact of these events are already present in the equity funds offered by the plan. These are relatively large financial institution and are therefore widely held by institutional investors like the Western Pension Plans. But, the good news is that Western’s Pension Plans are well diversified and as such, exposure to any one company including the aforementioned companies is minimal.

As of February 28, 2023, the following funds on the Western Pension Plans had exposure to equities issued by these financial institutions:

Diversified Equity Fund: 0.03%
Balanced Growth Fund: 0.02%
Balanced Income Fund: 0.01%
U.S. Equity Hedged Fund: 0.14%
U.S. Equity Unhedged Fund: 0.14%

These exposures are small and it should also be noted that they would not necessarily result in a loss in a member investment option as the rest of the securities in the portfolio may have performed well (see below for month-to-date performance for the funds affected).

In addition, these financial institutions also issue fixed income securities. Two components of the Diversified Bond Fund, the AB Core Plus Advanced Bond Segregated Fund and the AB Global Plus Fixed Income Segregated Fund, held bonds issued by Credit Suisse.

Approximately 0.32% of the AB Core Plus Advanced Bond Segregated Fund was invested in Additional Tier 1 Bonds (AT1 Bonds). Unfortunately, as part of the merger with UBS, those bonds were written down to zero. It’s an unusual development to have bonds fully written down while the equity of a company retains some value. There will probably be some lawsuits as a result of this. In the meantime, regulators in other jurisdictions, in particular the UK, Europe and Canada, have stressed that a situation where bondholders suffer losses before equity holders would not happen in their jurisdiction.

The AB Global Plus Fixed Income Segregated Fund had a 0.44% exposure to Credit Suisse bonds, approximately 0.15% to AT1 Bonds and 0.29% to secure senior bonds. The latter would be subsumed within the UBS group and thus remain whole. Although disappointing, the write-down of AT1 Bonds only caused a 0.14% loss for the Diversified Bond Funds. It is important to note that AT1 Bonds were eligible securities to be held in the AB portfolios. While those securities were rated B+ by Standard & Poor’s, which means that they were not considered investment grade, the AB Core Plus Advanced Bond Segregated Fund and the AB Global Plus Fixed Income Segregated Fund are allowed to invest respectively up to 30% and 20% in high yield bonds (non-investment grade bonds). As of February 28, 2023, the AB Core Plus Advanced Bond Segregated Fund and the AB Global Plus Fixed Income Segregated Fund held 6.8% of its portfolio in high yield bonds, while the AB Global Plus Fixed Income Segregated Fund held 5.0%, well below the limit.

Despite the fact that securities issued by the four aforementioned financial institutions (SVB Financial Group, Signature Bank, First Republic Bank and Credit) lost most or all of their value since the beginning of March, the strong diversification of the Western Pension Plans investment options have allowed them to weather the storm relatively unscathed.

Month-to-Date Performance (March)

As of March 23, 2023, the six investment options directly affected by the banking industry problems have posted the following returns:

Diversified Equity Fund: -1.32%
Balanced Growth Fund: -0.23%
Balanced Income Fund: 1.21%
U.S. Equity Hedged Fund: -0.42%
U.S. Equity Unhedged Fund: -0.08%
Diversified Bond Fund: 2.30%

By comparison, the Canadian stock market, as measured by the S&P/TSX Composite Index, has returned -3.28% so far in March (as of March 23, 2023).

Should any significant future events occur in the banking industry, we will provide appropriate updates on this website.

No actions are required by members of the pension plans, but if you have any questions, please use ASK HR to contact Human Resources.

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Volatility in the Banking Industry