Cases and Solutions

The MIPC focuses on addressing societal issues which large, institutional investors play a critical role in. Our cases center on solving these issues through innovative portfolio strategies that satisfy the needs of a broad range of stakeholders with competing interests.

2017

Rescuing a Canadian Private DB Pension Plan

A lumber company in British Columbia runs a heavily underfunded pension plan. The managers of the plan’s fund face pressure from shareholders who want to limit cash outflows from the company into the plan, the government that imposes strict solvency regulations, and beneficiaries of the plan who rely on their pension for their retirement. The case highlights how the asymmetric treatment of the fund’s shortfall and surplus can lead to conflicting interests among stakeholders.



2018

Severe Underfunding of U.S. State Pensions

A large public pension plan in the U.S. is in danger of collapse. The fund’s Chief Investment Officer must find a long-term portfolio solution that meets the needs of state unions who represent public interests, municipalities who contribute capital to the fund, the state government’s political agendas, federal regulations, and active and retired members of the plan. The case highlights how the going concern regulation creates an intricate relationship between the asset allocation of the fund, its funding ratio, and the required contribution from the municipalities.

2019

Environmental Sustainability

A fictional public pension fund in Newfoundland and Labrador is under pressure to divest from its oil & gas holdings, while simultaneously satisfying the provincial government who relies on the local O&G industry, taxpayers who contribute funds to the plan, indigenous groups who define how their lands are used, a local O&G union who employs workers in this sector, and pensioners of this plan.

 

 

 

 

 

2020

Protectionism and Social Inequalities

Case to be released in September

Rescuing a Canadian Private DB Plan
(2017)

LumberCo Inc. (“LBC” or “the Company”) is a Canadian corporation specialized in producing wood products and selling them across North America. When the company was founded in 1956, it established a pension fund (the “DB Pension Fund”) offering defined benefits to some of its employees after retirement. In 2000, the company decided to close the DB Pension Fund to new employees and instead created a defined contribution pension fund for them (the “DC Pension Fund”).

 

Suzie Cartier has been working for the DB Pension Fund since the beginning of her career. After 40 years of hard work, she is now the president and chairman of its investment committee. Suzie recently received an updated actuarial report ringing the alarm bell. The DB Pension Fund, which currently manages C$857M of assets, is facing a shortfall of C$264M. While the shortfall itself is not news, the fund’s solvency ratio just reached a new low point of 76.45%, which is below the 80% threshold commonly viewed as the minimum funding threshold.

 

Upon hearing the news, Jane Larsson, CFO of LumberCo, decided to consult Suzie to find a long-­term solution. Jane is in a difficult situation. As the Company’s CFO, she must make sure that the Company will not have to inject too much cash into its DB pension fund, otherwise she will face pressure from shareholders and risk losing her job. However, Jane must also respect the Canadian pension laws that require any corporate pension fund to meet a solvency ratio of 100% over a period of 5 years.

 

Jane and Suzie came to a common agreement. LumberCo. will inject $50M into the DB Pension Fund in 2018 to help with the underfunding problem. In the meantime, Suzie must completely review the asset allocation of the fund in order to minimize the future cash inflows that the Company will have to inject into its DB Pension Fund, and still be able to pay the promised pensions. To facilitate the process, Jane told Suzie that the Company would cover all the trading costs associated with the overall portfolio restructuring.

As a result, Suzie is looking for innovative ways to invest the DB Pension Fund’s assets while satisfying all the parties involved, and keeping the risk level in check. On September 1st, she decided to review the Statement of Investment Policies and Procedures of the DB Pension Fund and launch a call for consultants to design a new asset allocation strategy.

Severe Underfunding of U.S. State Pensions
(2018)

 

 

The 2018 edition of the McGill International Portfolio Challenge centers on the case of a severely underfunded state defined-benefit pension plan—VanPERS—which delivers pension benefits to public-sector employees in a fictional U.S. state, Vandalia. The funded status and other metrics of the plan are deliberately chosen to reflect the current situation of state pension funds in the U.S., where a potential pension crisis arguably looms.

 

The underfunding of state pension plans like VanPERS is incredibly complex and difficult to solve because it involves a uniquely large and diverse group of stakeholders with conflicting interests. In the case of VanPERS, stakeholders include: unions, which represent the interests of Vandalia’s public servants; municipalities, which run tight budgets and contribute capital to the fund on behalf of their public employees; the government of Vandalia, which adheres primarily to its political agenda that is oftentimes at odds with other stakeholder interests; and finally, active and retired members of VanPERS, who want to secure the safety of their pensions.

 

How U.S. regulation compounds the complexity

 

Going concern, the U.S. regulation that mandates pension funds to discount their liabilities at the expected rate of return on their assets, significantly increases the difficulty for pension funds. In effect, going concern creates an intricate system that links the financial decisions of the fund to the financial distress of member cities. As a consequence of this relationship, the going concern regulation (a) incentivizes pension funds to be heavily invested in riskier assets (e.g. equities), as doing so allows them to report lower liabilities and improved funding ratios; and (b) it discourages the implementation of worthwhile de-risking initiatives, since such initiatives would force them to report higher liabilities and weaker funding ratios.

 

Soliciting a fresh perspective from teams around the globe

 

Participating teams of this year’s MIPC will assume the role of external consultants hired by VanPERS’ Board of Directors. Their task is to come up with a creative and feasible solution that addresses VanPERS’ severe underfunding. Teams must contend with the diverging interests of the wide number of stakeholders, settle on a solution where some stakeholders are bound to be disappointed, and rank these disappointments appropriately.

 

Finding a way out of this pension problem and charting out a realistic plan for restoration undoubtedly requires out-of-the-box thinking and inventive problem-solving. MIPC is opening up this challenge to University students from around the globe with different viewpoints and experiences—many of whom might have never encountered this issue before. As a result, the participating teams of MIPC will bring along a wide variety of fresh perspectives to the table, and it is our sincerest hope that their contributions and creativity will help us find a way out of this potential pension crisis.

Designing a Sustainable Investment Strategy
(2019)

 

The pressure for pension funds to implement more sustainable investment strategies

This year’s edition of the McGill International Portfolio Challenge centers on the Newfoundland and Labrador Pension Investment Board (NLPIB), a fictional asset manager responsible for managing $15B of assets of the province’s 3 largest public pension plans. Recently, NLPIB has come under pressure to implement more sustainable investment strategies and, in particular, divest away from its holdings in the oil & gas industry, which have traditionally been a large, revenue-generating component of the fund’s assets and one of the largest sources of economic growth in the province. The purpose of this case is to devise an optimal portfolio strategy that accommodates the competing interests of the different stakeholders involved and addresses climate risks.

 

Soliciting a fresh perspective from teams around the globe

With the complex nature of the issue and its impact on the long-term health of the fund in mind, participating teams are expected to come up with an overhauled sustainable asset allocation strategy which accommodates the conflicting interests of different stakeholders and addresses climate risks. The participating teams of MIPC will bring along a wide variety of fresh perspectives to the table submit a proposal that is realistic and viable for NLPIB. It is our sincerest hope that their contributions and creativity will help us find a path to a greener future.