Diversification strategy

OPTrust takes a comprehensive approach to identifying and managing a wide range of factors that can impact our ability to achieve the Plan’s funding target return.

The overarching risk the Plan faces is that of not generating sufficient investment returns to fund members’ and retirees’ current and future pension entitlements from the investment returns. Long-term funding comes from a combination of members’ and employers’ contributions and investment earnings. Less funding from one of these sources typically means that the Plan requires more from the other. To help manage this risk, we conduct periodic asset/liability studies to ensure that our investment portfolio is structured to meet our funding requirements over the long term, while keeping investment risk within limits established by OPTrust’s Board of Trustees.

Our most recent asset/liability study was completed in 2009. It measured the projected impact of a wide range of possible asset classes on expected 10-year total fund returns and compared them with the anticipated growth in the Plan’s pension liabilities under a variety of economic scenarios. The result was a series of changes to our long-term asset mix targets approved by OPTrust’s Board.

These adjustments to OPTrust’s diversification strategy are expected to improve the Plan’s ability to meet our funding target over the long term, while reducing the annual volatility of the Plan’s returns. The changes, which are being implemented over the next five years, include:

• a gradual reduction in the Plan’s allocation to public equities to 25% of the Fund, compared to 47% at the end of 2010
• increasing the target allocation for private equity to 15%, up from the previous target of 10%, and the portfolio’s current weight of 3.3%
• increasing the target real estate allocation to 15%, up from the previous target of 10%, and the current weight of 10.7%
• adding a new 5% allocation to energy commodities in two phases in 2010 and 2011
• reducing the long-term allocation to real return bonds to 2.5% of the Fund.

The study also supported maintaining the Plan’s current long-term allocation to infrastructure investments at 15%. Since the portfolio’s launch in 2006, it has grown to 4.9% of the Total Fund at the end of 2010.