Chris Kautzky, Chief Investment Officer, shares his insights into OPB’s performance in 2023 and into our ongoing commitment ensuring that the Plan continues to contribute to the long-term retirement security of our members.
How Did OPB’s Investments Perform in 2023?
The single most impactful development this year was the continued volatility in interest rates with government bond yields rising through the first nine months of the year and then falling dramatically in the last quarter. The rise in rates was driven by the efforts of central banks around the world, including the Bank of Canada, to combat inflation. In particular, the volatility in interest rates directly affected fixed income assets, such as bonds, and created challenges for many assets, especially those reliant on borrowing or sensitive to increased borrowing costs.
Against this background, our public equity investments generally performed well, as did our global credit assets, but that represents only a portion of our portfolio. Within our global Real Estate portfolio, higher interest rates hurt valuations for our office properties, which were also being affected by COVID-related vacancy challenges and the move to remote work. Retail properties were also negatively impacted but showed signs of recovery from the slowdown that occurred during the pandemic. Our investment manager, IMCO, made progress in divesting some retail properties, a development that was consistent with its long-term strategy for managing the Real Estate portfolio. By contrast, our infrastructure holdings delivered positive results, although the returns were slightly below benchmark.
Market factors also impacted our investments in public market alternatives. These are diverse assets that aim to deliver absolute returns, and they also came in below their benchmark.
All these events must be considered from a long-term perspective. As a long-term investor, it’s important to remember that we are more focused on executing our long-term strategy which was last updated with a new Strategic Asset Allocation in 2020.
We are regularly reviewing the long-term strategy to ensure it will meet our needs over the coming years, even decades. While annual results may be concerning, it’s vital not to overreact to short-term moves or events that may end up only really being noise.”
Chris Kautzky, Chief Investment Officer
How did IMCO manage OPB’s investment strategy in 2023?
Our relationship with IMCO remains strong, and we work together in the best interests of the Plan and our members. In 2023, IMCO had mixed results across the various asset classes the Plan invests in, as noted above. That said, IMCO made good progress in advancing our Strategic Asset Allocation (SAA) towards our targets in what was a volatile environment. We believe the SAA is our most important investment decision when it comes to producing returns and managing risk. It sets out what assets and asset classes we allocate funds to and how much of any particular asset or asset class we hold in our portfolio. We are near the end of phasing in our new SAA, and our asset mix is broadly where we planned. The one exception is our public market alternatives (PMA) allocation. These are diverse assets that aim to deliver absolute returns, and we paused our plan to increase our PMA location.
Looking forward to 2024, we plan to review our long-term PMA allocation, as well as other components of the SAA, through a comprehensive asset/liability study.
Given the dramatic changes in the capital markets environment, the ongoing evolution of the Plan’s demographic characteristics and the fact that it’s been four years since we last did a comprehensive review of the SAA, we have begun work on an asset/liability study for planned completion in 2024 that will update and reset our long-term investment strategy.”
Chris Kautzky, Chief Investment Officer
How does IMCO create value for PSPP members?
IMCO was created as an independent investment manager to provide public sector funds with access to a broader range of investment strategies. True to that purpose, IMCO is executing strategies that OPB would not have been able to do on its own. It has been able to build an in-house team that can manage assets like infrastructure, global credit and public equities, which provides us with greater oversight and reduces the costs associated with relying on third-party managers. With its greater scale and reach, IMCO is also able to exert more influence on investee organizations when it comes to matters related to ESG, notably climate change.
IMCO made notable progress over the year on pooling client assets – the global credit strategy and private equity strategy were both pooled in 2023, and we expect real estate to be pooled in 2024. These moves, together with the continued internalization of investment management, will ultimately result in lower costs for IMCO’s clients, including OPB. And all things being equal, lower costs lead to improved net returns.
Finally, OPB and IMCO are aligned in their investment philosophies. IMCO continues to invest for the long term, which is the appropriate focus for a pension plan such as OPB, which is focused on meeting its long-term commitments to its members.
Pooling delivers operational efficiencies, eliminates duplication of effort and supports consistency when it comes to execution strategy across IMCO’s clients, including OPB.”
Chris Kautzky, Chief Investment Officer
Chief Pension Officer Peter Shena comments on a range of issues, including OPB’s progress on our crucial pension modernization initiative and the steps taken to meet members’ needs in 2023.
What progress did OPB make on pension modernization in 2023?
2023 was a pivotal point in our multi-year pension modernization journey.
In 2019, we launched our pension modernization initiative, moving to replace our pension administration systems as they were nearing end-of-life and required replacement. OPB’s existing systems would not be able to support modern service delivery and the ability to provide members with an enhanced client experience. In the first phase we updated our member and employer portals.
In 2023, as part of phase 2, we decided that choosing a commercial off-the-shelf (COTS) system was the most effective and efficient path to modernizing our pension administration systems.
In the summer of 2023, we released a comprehensive request for proposals (RFP) to vendors, looking for a partner that could provide us with a proven pension administration system solution that could be configured to meet our needs.
Our pension modernization effort has a foundation of considerable practical research. The thought and care that went into our RFP is going to be reflected in a positive outcome.”
Peter Shena, Chief Pension Officer
By the end of the year, we had already received a number of qualified proposals and selected a robust team with the right knowledge from across the organization to evaluate the submissions. We expect to choose a vendor by the middle of 2024 and begin the necessary planning to implement the new system with our new partner.
How did OPB meet members’ needs in 2023?
OPB strives to deliver excellent service. That’s a goal we’ve been able to achieve over the years thanks to the thoughtful approach of leadership and the commitment of our staff. For more than 25 years, CEM Benchmarking has been collecting extensive cost-efficiency and performance data from the world’s leading pension and sovereign wealth funds. In 2023, CEM rated OPB second among our peer organizations in Canada when it came to delivering excellent client service and eighth among our global peers.
Robust membership is a sign of a healthy pension plan. Over the course of 2023 and for the second year in a row, our staff enrolled close to 7,000 new members to the PSPP. These new members help to improve the ratio of contributing to retired members, which enhances the long-term financial health of the Plan.
In 2023, we welcomed more than 500 new members from Legal Aid Ontario into the PSPP as our latest pension consolidation.”
Peter Shena, Chief Pension Officer
Helping members make better-informed decisions about preparing for and managing their retirements is part of our Advise and Protect mission. In 2023, we expanded access to education for members by launching open access to Pension Overview and Pre-retirement Overview sessions that members can self-register for on e-services. This enables members to access pension education sessions on their own, in addition to sessions that may be organized by their employer or Bargaining Agent.
Given the funded status of the Plan, should I be worried? Will my pension still be there when I retire?
For over a century, the Plan has been helping its members enjoy financial security and peace of mind in retirement. During that time, we’ve weathered many financial storms and periods of market uncertainty. In 2023, the funded status of the Plan was again impacted by volatile financial markets and the continuation, for most of the year, of high interest rates. This resulted in higher-than-anticipated salary growth, which placed additional cost pressures on the Plan.
Our Plan is built to withstand such events. We regularly conduct studies, which help us to ensure that the Plan’s funding structure is robust and able to meet its commitments to members. We will be conducting another review in 2024.
As the Plan administrator, we focus on the long term. We have successfully faced challenging situations in the past and we will again.
What can you tell us about your upcoming role as Chief Transition Officer?
In 2023, OPB announced that both Mark Fuller and I will be retiring in 2024. Guided by the Board, OPB also undertook a rigorous and successful search process for a new CEO. In early 2024, in a preparatory step to becoming CEO later in the year, Darwin Bozek will become OPB’s President and Chief Pension Officer. I will move into the role of Chief Transition Officer, working with Darwin to help familiarize him with the PSPP and our unique advisory approach to delivering service.
Throughout 2024, I am happy to remain available to help assist with a smooth transition and to provide leadership continuity on critical projects.
