With invested assets of $14.7 billion, OPTrust manages one of Canada's largest pension funds. Our investment program is designed to meet one fundamental objective: generating the long-term rate of return needed to provide our almost 84,000 members and retirees with a secure lifetime pension.
Funding target return
To meet this funding obligations, we expect the Plan's investment portfolio to achieve a real average annual return of 4.0% after inflation, over the long term. Factoring in the Plan's 2.5% inflation assumption for 2012, our nominal target return for funding purposes was 6.5% for the year. (In late 2012, OPTrust reduced its assumed rate of inflation by 25 basis points, lowering the Plan's nominal funding target return to 6.25% starting in 2013.)
This long-term return objective is key to establishing the Plan's asset mix, developing OPTrust's investment strategy and determining an appropriate level of investment risk for the Fund. The target return also provides an important reference point for measuring the Plan's performance against our funding requirements, particularly over the long term.
Over short-term time horizons, we expect the Plan's returns to rise and fall from year to year, in response to the same factors that shape the overall performance of the markets in which we invest.
We therefore compare OPTrust's total fund return to the performance of a composite “policy benchmark portfolio” that reflects OPTrust's allocation to the various asset classes held by the Plan. For most asset types, the benchmark portfolio is based on widely recognized indexes. For certain alternative investments, the benchmark reflects a custom index or a proxy for the portfolio's expected long-term return.
As a result, the composite benchmark's return provides a useful point of reference for measuring the added value generated by OPTrust's active management of the Fund.
In 2012, OPTrust's investment program achieved a 10.1%return for the Total Fund, outperforming both the 7.2%return for our composite benchmark portfolio and our 6.5% funding target return for the year.
Net investment income for 2012 was $1,237 million, compared to $578 million the year before, when the Plan returned 5.5%. The added value generated by active management of the Fund was 2.9% or $400 million in 2012.
Over OPTrust's 18 years of operation, the Plan's investment portfolio has realized an average gross annual return of 8.6%, exceeding both our 7.4% composite benchmark return and our 7.2% average funding target for the same period.
OPTrust's diversified investment portfolio achieved a 10.1% return in 2012, outperforming the 7.2% return for our composite benchmark in a year marked by strong returns for the Plan's public equity, real estate, infrastructure and private equity portfolios. OPTrust's average return of 8.6% since the Plan's launch in 1995 exceeds both our benchmark and the Plan's funding target for the same period.
* More information on OPTrust's investment strategy and performance are available in our 2012 Annual Report. Detailed information on OPTrust's investment strategy is also available in our Statement of Investment Policies and Procedures (PDF, 129 KB).