Morningstar DBRS Confirms British Columbia Investment Management Corporation at AAA, Stable Trends

DBRS Limited (Morningstar DBRS) confirmed the Issuer Rating of British Columbia Investment Management Corporation (BCI or the Corporation) at AAA. Morningstar DBRS also confirmed the credit rating on BCI's Medium-Term Notes (MTNs) at AAA. All trends remain Stable.

BCI invests on behalf of 29 clients in British Columbia's public sector. These clients include 10 public sector pension funds, three insurance funds, and 16 special-purpose funds comprising public trusts, endowments, and government bodies. BCI reports its results based on its six largest pension plan clients by assets under management (AUM), referred to as the combined pension plan clients, namely BC Hydro Pension Plan, College Pension Plan, Municipal Pension Plan, Public Service Pension Plan, Teachers' Pension Plan, and WorkSafeBC Pension Plan.

KEY CREDIT RATING CONSIDERATIONS
The AAA credit ratings and Stable trends are supported by a substantial and stable asset base, low leverage, ample liquidity and strong operating performance. Moreover, the Province of British Columbia (the Province; rated AA (high)) is a plan employer partner of the four largest pension funds managed by BCI, which provides considerable stability and certainty of cash flows. Despite financial market volatility, the Corporation has demonstrated consistently good returns by maintaining a well-diversified portfolio consisting of quality assets. BCI provides investment management services to British Columbia's public sector and is not responsible for its clients' pensions or other liabilities. BCI's portfolio also includes a sizable portion of equity, real estate, and infrastructure, which can be riskier or less liquid but has higher return potential. Nonetheless, BCI maintains a right-sized liquidity position to make up for the illiquid nature of these investments as well as allow the Corporation the flexibility to allocate capital to new opportunities, portfolio companies, and investment funds.

CREDIT RATING DRIVERS
Morningstar DBRS would downgrade the credit ratings if BCI were to experience a material change in its legislative framework. The credit ratings would also be downgraded if BCI delivers weak investment returns consistently below benchmarks over time or causes a material decline in AUM.

CREDIT RATING RATIONALE
Legislated Framework: AAA
BCI was established in 1999 under the Public Sector Pension Plan Act (PSPPA) to provide investment management services to public-sector pension and other clients in British Columbia. While there is no explicit legislation requiring its clients have their assets managed only by BCI, there are several mitigating factors that lock in clients, including the existing joint trust agreements with the four largest plans that specify that their pension funds shall be managed by the Corporation, though the agreements allow the pension trustees to use alternative asset management services if it is in the best interest of their plan members, which could significantly reduce net assets under the Combined Funds and debt coverage. Given the historical investment performance that is outperforming longer term benchmarks, Morningstar DBRS considers any wholesale change in the Corporation's role as the provincial public-sector asset manager a remote possibility. Furthermore, while BCI's clients are entitled to request the withdrawal of some or all of their investments from the Combined Funds (i.e., the pooled funds backing the MTN program), that right of withdrawal is subject to certain limitations under the terms of the fund management agreements with each client and the Corporation's internal investment policies and product descriptions.

Plan Sponsors and Demographics of a Plan's Membership: AAA
The Province, employer associations, and employees are the joint sponsors of the four largest pension plans whose funds BCI manages, which provides considerable stability and certainty of cash flows. Joint sponsorship of the pension plans is also credit positive as it leads to greater engagement on the part of the sponsors, particularly employees, in plan design and performance. BCI's plans have good demographic profiles with active-to-retired member ratios in the range of 1.23 times (x) to 1.94x and a stable basic account contribution rate of 14.2% with no expected increase in the short term.

Management Framework: AAA
BCI operates under a dual accountability model, as set out in the PSPPA. The board, acting independently of the Province, maintains oversight of the Corporation's operations, implementation of enterprise-wide risk management framework, pool fund policies and procedures, and reporting and accountability to clients and the minister of finance. The board is responsible for the appointment of the chief investment officer/chief executive officer who is accountable to each client for their investment returns and the management of their funds in accordance with legal contracts established with their clients, investment policies, and management frameworks. In addition, BCI is exposed to various risks but these remain manageable relative to its asset base (gross AUM of $250.4 billion) and long-term return of 7.8% as of March 31, 2024 (F2024). Strong liquidity coverage of 20 months (against 12 months' threshold) provides a cushion to absorb potential investment losses and shorter term market swings.

Financial Resources: AAA
In F2024, BCI had gross AUM and net AUM (gross AUM less financial leverage from repurchase agreements (repos) and unsecured debt funding) of $250.4 billion and $229.5 billion, respectively. During the year, net AUM grew by $14.5 billion from $215.0 previously, reflecting investment gains of $16.5 billion and client net withdrawals of $2.1 billion. For the Combined Funds or recourse assets, BCI closed the year with gross AUM and net AUM of $178.6 billion and $156.8 billion, respectively. These Combined Funds provide a considerable cushion against any potential claims arising from the recourse debt issued.

The Corporation delivered a one-year combined pension plan return of 7.5%, net of all fees, compared with the benchmark of 11.6% for the fiscal year. BCI outperformed benchmarks for all asset classes except real estate equity and private equity, both of which faced difficult market environments. Public equities, private credit, and infrastructure were the primary contributors, delivering returns of 20.4%, 13.3%, and 7.0%, respectively. Real estate was the only asset class with a negative return as it delivered -5.0% with office exposure suffering the largest declines in valuations.

Funding Status: AAA
BCI is not responsible for the pension liabilities of the plans, though a significant shortfall could affect asset allocation, liquidity, and contributions. The largest pension clients have been fully funded for several years, indicating their long-term viability, the adequacy of the current contributions rates, and the growth prospects for the assets available to eventually repay outstanding debt. The 2020-23 actuarial valuations of plans show the funded ratio was between 103.2% and 133.8% on a going-concern basis.

Liabilities: AAA
BCI has a funding program in place via repos secured by government bonds and unsecured debt issuances. At the end of F2024, total financial leverage was $21.0 billion (repo: $18.7 billion; unsecured debt: $2.3 billion), resulting in financial leverage of 9.1% within the funding program guidelines of 30% of net AUM and considered strong.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the DBRS Morningstar analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Rating Canadian Public Pension Funds & Related Exclusive Asset Managers (April 16, 2024), https://dbrs.morningstar.com/research/431261. In addition, Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at https://dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit https://dbrs.morningstar.com.

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