Market volatility and the security of your OPTrust pension

posting date Posted: October 10, 2008
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October 10, 2008 –In September and early October, Canadian and international investment markets experienced sharp declines in response to the deepening global financial crisis.

As a long-term investor, OPTrust anticipates that market returns may experience significant short-term volatility from time to time. Our investment program has been designed to consider market risk and return in the asset classes in which we invest over a five-to-10 year time horizon, in order to achieve the long-term returns needed to pay for our members’ and retirees’ pensions.

At the same time, OPTrust’s members and pensioners enjoy the security of a defined benefit pension. According to our recent actuarial valuation, the OPSEU Pension Plan had a $470 million funding surplus as of December 31, 2007. This surplus has been added to the Plan’s existing contribution rate stabilization funds, bringing the total stabilization reserves to $878 million at the start of 2008.

Managing investment risk
OPTrust’s returns, like those of all major institutional investors in global markets, are impacted by significant market trends. We are actively monitoring the current financial crisis and have reviewed our investment exposure to companies and securities that have been most directly involved in the current crisis. OPTrust’s combined exposure to these types of assets is not material to the fund.

Credit quality is at the centre of the current crisis. Fortunately, OPTrust has followed a stringent policy designed to restrict credit risk associated with debt securities to securities with an investment grade rating. As a result, the Plan has no direct exposure to the toxic securitized assets that have triggered the current financial crisis. 

We are continuing to implement our long-term investment diversification strategy. The goal is to manage the Plan’s exposure to specific markets while increasing our ability to generate the returns needed to fund members’ and retirees’ pensions over the long-term. Since 2003, we have gradually reduced our exposure to the public equity and fixed income markets while increasing our investment in private equity, infrastructure and real estate.

We further cushion the Plan against market volatility through the use of a technique called “actuarial smoothing.” Smoothing involves recognizing each year’s investment gains or losses over a five-year period, reducing the short-term impact of year-over-year changes in investment returns on the Plan’s funded status. This means that any loss that may result from the current market slide would be recognized evenly over the five years between 2008 and 2012.

Together, these strategies will help to reduce the impact of the current market volatility on the Plan’s funding status.

A secure pension
In the meantime, the financial crisis has highlighted the security of our members’ and retirees’ OPTrust pensions.

The OPSEU Pension Plan is a “defined benefit” plan. This means that when members retire, their pensions are calculated based on their best five-year average salary and their years of credit in the Plan.

Unlike a defined contribution pension plan, individual RRSPs and other personal investments, members’ OPTrust pensions are not affected by fluctuations in the financial markets. Instead, our retirees receive a secure monthly pension that increases each year to keep pace with inflation. This pension is backed by the Plan’s assets and the future contributions of our more than 47,000 members and the Government of Ontario.

Plan surplus
OPTrust’s members, pensioners and sponsors have the added security of a $470 million funding surplus. This surplus was identified in the Plan’s recent funding valuation as of December 31, 2007, and reflects OPTrust’s strong investment returns from 2003-2006.

The Plan’s sponsors, OPSEU and the Government of Ontario, have chosen to add the surplus to their existing contribution rate stabilization funds. This prudent decision means that the Plan has stabilization reserves of $878 million, as of the start of 2008. The sponsors can use these funds to offset the impact of any future funding loss that may result from the current market downturn.

Stable contributions & benefits
This is a strategy that has served OPTrust well in the past. In 2002, OPSEU and the Government of Ontario set aside a portion of past gains in separate stabilization funds. Between 2003 and 2007, these funds were used to cover unfunded liability payments totalling $172 million.

As a result, OPTrust was able to avoid the contribution increases and benefit reductions experienced by a number of other pension plans, while the Plan’s $428 million deficit as of December 31, 2004, was gradually eliminated through robust investment gains.

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