2016 was a year of extraordinary change, challenge and opportunity for OPB. Our Investments team successfully navigated the world’s volatile capital markets, which were rocked by the uncertainty of issues such as a slowing Chinese economy and the surprising outcomes of the Brexit vote in the U.K. and the U.S. presidential election. Our investments return of 8.1% was a sound result, handily outperforming our benchmark return of 6.6% and the actuarial rate of return in valuing the plan (5.70%). We successfully managed the funded status of the Plan, as we ended 2016 with an estimated funded status of 97% despite strengthening certain long-term actuarial assumptions as outlined in further detail below and throughout this annual report. We remain well on track to deliver the pension promise, to protect the PSPP for the long term and to continue to act as a trusted and expert advisor to PSPP beneficiaries and other stakeholders.
2016 was a year of change for our Board. As the term of former chair Vincenza Sera ended in June, I stepped in as Acting Chair during this time of transition. Through the appropriate governance process, the Board put forward Geri Markvoort as our candidate for Board Chair. This was approved by the Government of Ontario in early 2017. I would like to congratulate Geri and welcome her to the role of Board Chair. Three Board members stepped down in 2016, as their terms ended: Vincenza Sera, Hugh Mackenzie and Lisa Hillstrom. I would like to thank each of them for their years of service and significant contributions to the Board’s oversight role. The Board also welcomed four new members: John T. Por, a pensions governance expert; Michael Briscoe, Chief Administrative Officer for OPP; Dave Bulmer, CEO of AMAPCEO; and Lynne Clark, a recently retired CPA® who will chair our Audit Committee. Together, they bring extensive experience to our Board on pension governance, accounting and finance, labour relations, and human resources. Our Board is now at full complement, and I am confident we have the appropriate skill set and diversity to fulfill our fiduciary responsibilities. I will continue to serve as Vice-Chair of the Board.
I am pleased to report that Hugh Mackenzie and Vincenza Sera were appointed to the newly established Investment Management Corporation of Ontario (IMCO) Board, and took up these responsibilities in July of 2016. As part of the governance plan for IMCO, the founding partners, OPB and WSIB, each have the right to nominate two of the seven initial IMCO Board members. Vin and Hugh bring a wealth of experience as seasoned OPB Board members, and we are confident that the PSPP expertise they bring to the IMCO Board will help ensure a smooth transition and positions them well to represent the interests of IMCO’s members.
2016 marked a year of excellent achievement in our investment returns and managing the Plan’s funded status. In 2016, we undertook a Long-Term Funding Study, to ensure the Plan’s long-term sustainability as we expect investment returns going forward to be lower than in the past, while at the same time ensuring its affordability through maintaining reasonable contributions. Investment returns are key, as roughly 70% of the benefits paid out by pension plans are funded through investment returns alone. We opted to reduce our discount rate from 5.95% to 5.70%, reflecting our view that it will be more challenging to earn returns at the higher level for the foreseeable future, and will likely be recommending a small increase in contributions. This will help ensure the long-term viability of the Plan.
In 2016, we also undertook an asset/liability (A/L) study, in conjunction with outside consultants. The study helps us confirm whether we have the right asset mix in place to achieve the long-term rate of return required to pay the pension promise. We are pleased that the study confirmed we are on the right path and should continue to shift our Strategic Asset Allocation targets from public markets to private markets. It also supported our decision to lower our discount rate.
We continued to mature our responsible investing (RI) initiatives in 2016. We developed our first RI policy, an extensive document outlining our philosophy and guidelines with respect to RI. In August, we hired a Director of RI with considerable industry experience. She will guide our RI initiatives going forward.
Numerous milestones were achieved in 2016 as we moved asset pooling forward in preparation for the launch of IMCO in 2017. After an extensive search OPB’s senior executive participated in, a new CEO, Bert Clark, was announced in October of 2016. Staff and management from the founding partners, OPB and WSIB, are working together closely to prepare for the operational launch of IMCO.
OPB will continue to maintain its fiduciary responsibility to the Plan and control our Strategic Asset Allocation in alignment with governance best practices. Importantly, we will continue to own our assets and have full responsibility for our liabilities and only our liabilities. OPB will maintain a Head of Investments position to oversee IMCO and ensure IMCO is managing our assets in accordance with our investment policies and the Investment Management Agreement. We look forward to the challenge and opportunity this exciting new relationship between IMCO and OPB presents and are confident that pooling our assets under IMCO’s management will benefit the financial status of the Plan and is in the best interests of Plan beneficiaries and stakeholders.