Funding the Promise with CEO Mark Fuller
Our Mission: Advise and Protect
OPB’s mission in managing the PSPP is Advise and Protect. We are committed to providing our clients and stakeholders with tailored advice and counsel to enable them to make excellent decisions about the pension plan. OPB is equally committed to responsibly managing the long-term health of the Plan to protect the pension promise for today’s and tomorrow’s public servants. In last year’s President’s message, I reflected on our journey over the past 25 years as the Plan’s administrator, and how very proud I am of our accomplishments. Over the past year, we spent significant time planning for changes that will help us ensure the next 25 years are just as successful, including the upcoming transition of our investment management to IMCO and modernizing our pension systems.
In 2015, we formally launched in-house Advisory Services for our members, and in 2016, we put our new services to the test, helping almost twice the normal number of members navigate the decision to retire and commence their pension. Not only did we experience a surge in retirements, but we also had increases in related services such as buybacks, enrolments and pension estimates. Our Advisors provided one-on-one, personalized counselling to help over 3,000 clients make critical pension decisions. OPB’s advisory offering is truly unique and groundbreaking in the defined benefit pension industry. All our Advisors have pension expertise and hold or are in the process of obtaining a Certified Financial Planner® accreditation. This means they can help our members understand their pension decisions in the context of their broader financial and life circumstances.
Part of our effort to protect the strong financial position of the Plan is to carefully steward our expenses. In 2016, we delivered advisory services and managed the spike in service demand, at slightly lower pension administration expenses, than in 2015.
On the investments side of the business, we successfully navigated another year of volatile markets that were exacerbated by uncertainty over the direction of the Chinese economy, the Brexit vote in the U.K. and the U.S. presidential election.
I’m pleased to report that we ended 2016 with a strong overall return of 8.1%, which had a value-add of 1.5% (145 basis points) over our benchmark of 6.6%. As of December 31, 2016, we remain well funded at an estimated 97% on a going-concern basis.
Protecting the Financial Health of the Plan
Over the past few years, I have spoken about our commitment to protecting the long-term sustainability and affordability of the Plan. To help us manage both, we conduct Long-Term Funding Studies every three to five years in order to assess the health of the Plan, and whether our current contribution rates are sufficient to fund the pension promise.
While our 2014 study didn’t show the need for us to make any immediate adjustments, it did alert us that some of the factors that affect the cost of providing pensions were under pressure. In particular, we were concerned about the impact of the continued low-interest-rate environment and continued increases in member lifespans. Given this, we decided to conduct a Long-Term Funding Study in 2016, ahead of schedule. Our preliminary analysis indicates that the long-term cost of providing benefits has, in fact, continued to increase since 2014.
The impact of lifespans is easy to understand, since the Plan pays pensions for the life of the retirees and their eligible survivors. So when lifespans increase, it means the Plan is paying pensions for longer than we expected when the contribution rates were set. Even a modest increase in lifespans across our more than 85,000 members and retired members has a material impact on the financial health of the Plan.
The low-interest-rate environment also has a significant impact. When we conduct valuations of the PSPP, our actuary assesses how much capital we need to set aside today to pay the future pensions for our members and retired members. To calculate the present value of the pool of capital, the actuary applies a discount rate (i.e., the rate of return the Plan expects to earn in the future) to the future payment stream (i.e., future pension obligations). The higher the discount rate, the less money needed to fund the cost of pensions and vice versa. It is critical that we set this discount rate with an eye to the investment return we can realistically expect to earn in the future because if our long-term average investment return is not at least equal to the discount rate, then the Plan’s liabilities will grow faster than its assets and the financial health of the Plan will deteriorate. We concluded that in the continuing low-interest-rate environment, we needed to lower our expectation for the future long-term average investment returns from 5.95% to 5.70%. This has increased the liabilities of the Plan by approximately $500 million. However, this is part of our effort to protect the health of the Plan and the pension promise. Despite this change, due to strong investment returns in 2016, the Plan remains very well funded at an estimated 97%.
The reality is that the cost of providing the benefits in the Plan is increasing. As a result, it is likely that, in 2017, OPB will be recommending a modest contribution rate increase for both members and employers.
Investment Management Corporation of Ontario (IMCO)
For the last several years, I have spoken about OPB’s effort and role in the initiative to create a new investment management entity with the scale to be a world-class global institutional investor. I regard this initiative as a central plank in our strategy to protect the long-term sustainability of the PSPP.
Therefore, it is with great pleasure I can advise you that, in 2016, the Government of Ontario formally established the Investment Management Corporation of Ontario (IMCO), which will be the investment manager for OPB upon the commencement of its operations in June of 2017.
We believe pooling our assets under IMCO’s management will improve our risk-adjusted return through scale, which will enhance our access to a wider array of asset classes, among other advantages. IMCO is controlled by its members and is independent of government. We believe pooling our assets under IMCO’s management is an eminently sensible approach to achieving excellence and efficiency in the management of the many medium-size and smaller asset portfolios across the Ontario public sector.
While IMCO will manage our current and future assets, OPB will continue to own the PSPP assets and set the Strategic Asset Allocation, or asset mix, that will govern how IMCO invests our assets. We will also establish key performance benchmarks and targets for IMCO and oversee its performance. As a member, OPB will continue to participate in the appointment of experts to the IMCO Board of Directors and influence the governance of IMCO.
From a human resource perspective, the talented investment and investment finance professionals from OPB and WSIB will move over to IMCO. I am delighted that Jill Pepall, our Chief Investment Officer, will be the first CIO for IMCO; Michel Paradis, our Chief Financial Officer, will be its first CFO; and Gayle Fisher, our Chief Administrative Officer, will be IMCO’s first head of HR. I am confident that they will each make strong contributions to IMCO. This continuity of personnel is critical to ensuring a smooth transition to IMCO.
Looking Forward to 2017
In addition to managing the transition of our investment management to IMCO, we will be focusing on our Pension Modernization initiative.
Pension Modernization focuses on creating a pension administration system that will allow us to meet the evolving needs of our clients and stakeholders and ensure our technology remains current and our clients’ personal information remains secure. Our Chief Pension Officer, Peter Shena, talks more about Pension Modernization and how it will benefit members in his Q&A.
I want to thank the Board – both our new members and past – the leadership team, and all our employees for their tremendous commitment, dedication and hard work over the past year. As we continue to evolve, I am confident that our outstanding pension administration team, investment management through IMCO, and commitment to putting members first will enhance our ability to advise our stakeholders and protect the Plan.
Mark J. Fuller
President & CEO