Financial Statement and Funding Valuations
The financial position of the Plan is presented using two different methods: funding valuations and financial statement valuations.
An actuarial funding valuation presents the Plan’s financial information in a manner determined by OPTrust’s Board of Trustees and is subject to regulatory constraints. It determines if the Plan’s assets, together with expected investment income and projected future contributions in respect of current members, are sufficient to fund members’ expected benefits.
This valuation approach is known as the modified aggregate method. It identifies any gains and losses that have occurred since the last funding valuation and confirms the overall contribution requirements until the next valuation. The funding valuation uses assumptions that are best estimates, with the exception of the discount rate, which includes a margin of conservatism.
Ontario regulations require a funding valuation to be filed with provincial authorities at least once every three years.
FINANCIAL STATEMENT VALUATIONS
OPTrust’s financial statements rely on an actuarial valuation prepared in accordance with Canadian accounting standards for pension plans. The financial statement valuation is prepared using our “best estimate” assumptions and does not incorporate margins of conservatism.
The valuation recognizes the increase in value of future obligations over time, and pension-related receipts and disbursements. Experience gains or losses on investment activities are recognized in the year incurred. Experience gains or losses related to other assumptions are recognized in conjunction with the funding valuation.
MESSAGE FROM THE CHAIR AND VICE CHAIR
2019 was a year of many accomplishments for OPTrust. First and foremost, the Plan continued to be fully funded, the most important measure of a pension plan’s success.
OPTrust also received external recognition for its excellence across several aspects of its operations, including awards for investment innovation, the design of the OPTrust Select website and its Globalvia infrastructure investment. OPTrust also achieved a top three ranking globally for its pension administration services from CEM Benchmarking. The Board also asked CEM to review OPTrust’s performance with respect to investments. The report shows that OPTrust has similar performance to its peer group and carries lower funded status risk and provides higher value add, relative to benchmarks. From a cost perspective, OPTrust’s costs were lower than its peer group, after adjusting for asset mix.
One of the Board’s key initiatives was to recruit a new CEO. In September, we were delighted to appoint Peter Lindley to lead the organization. A financial services industry veteran, Peter brings over 30 years of experience in strategy, investments and leading high performance teams, to OPTrust. His extensive experience is complemented by his strong commitment to defined benefit pensions and the Board is confident that, under Peter’s leadership, OPTrust will continue to deliver strong results for the Plan’s members.
While ensuring the Plan remains fully funded and sustainable for the long term is a core responsibility, we also want our members to continually have an exceptional service experience in their interactions with their pension plan. OPTrust is enhancing the technology to provide greater opportunities for team members to deliver value-added services to our members. Systems upgrades will also support the continued expansion of the Plan through OPTrust Select.
In 2019, the Board welcomed several new members. Bob Plamondon, Deborah Leckman and Richard Nesbitt were appointed by the Government of Ontario and Len Elliott was appointed by OPSEU. Government appointee Louise Tardif and OPSEU appointee Tim Hannah concluded their terms on the Board, and we thank both for many years of dedicated service to the Plan and its members.
To help the Board carry out its strategic oversight role, the Board has established four standing committees: Governance and Administration; Investment; Audit, Finance and Risk; and Human Resources and Compensation. During 2019, the Board named trustee Michael Grimaldi as Board Chair and Chair of the Governance and Administration Committee.
It is a great privilege to serve on the board of a defined benefit pension plan and oversee work that creates a more secure future for so many people. Good pensions create tremendous value for Ontarians in every corner of our province. We thank every member of the OPTrust team and our fellow Trustees for their ongoing commitment to pensions and to the ideals of sustainability and security.
MESSAGE FROM THE PRESIDENT AND CEO
I joined OPTrust in September, motivated by the idea of being part of a dedicated team that is doing great work on behalf of Plan members.
We listen to what our members tell us, and they say that their main priority is to know that their pension income will be there for them when they retire. They are also looking for simple and straightforward transactions with us.
In order to deliver on these priorities, OPTrust continues to focus on two things. Firstly, the funded status of the Plan — and I am happy to tell you that we are fully funded for the 11th straight year. Secondly, we focus on the member experience. I am proud to share with you that OPTrust received a top three global ranking for member services in the pension industry benchmark survey by CEM. The focus on the member was directly reinforced with the addition of the leader of Member Experience to the Executive Team when it was restructured.
The team is motivated, and I share the passion to continue to strive to serve our members even better.
STABILITY AND SECURITY
The fully funded status is the most important measure of a plan’s stability. Our focus remains on the challenges we face and how they may impact the funded status. These challenges include low interest rates, short-term market volatility, low long-term projections for investment returns and shifting geopolitical forces. As a result, we expect lower returns over an extended period of time.
We invest with these challenges in mind and in such a way to ensure pensions will be paid to tomorrow’s members, as well as today’s members. Our investment approach focuses on risk-adjusted returns, not just returns. It is a commonly accepted belief that a younger individual can afford to take more investment risks than a more mature person can. The same holds true for pension plans. Because OPTrust is a maturing plan — meaning the number of active members and the number of retirees is close to even — we need to be aware of the risk carried in our investments. Taking too much risk today means jeopardizing the ability to pay pensions in the future.
At OPTrust we recently announced the creation of a Sustainable Investing and Innovation team that will build on our current approach to responsible investing, while also identifying new opportunities to invest in sustainability. This reflects our commitment to overcome the unique challenges we face as long-term investors for the financial benefit of our members and society.
MAXIMIZING THE VALUE OF DIVERSITY
OPTrust’s members are diverse and so is our team. We aim to reflect that diversity in our team, yet there is always more that we can do. This past fall, among other diversity initiatives, we recognized “Orange Shirt Day” for the first time and have begun acknowledging the traditional lands of Indigenous peoples where our company has operations. We also launched the Celebrate Citizenship Initiative, which offers time for OPTrust employees who are new Canadians to take their citizenship oath. We partnered with Women in Capital Markets and the Investor Leadership Network to assess the organization’s gender representation in senior leadership roles. Our Board of Trustees enjoys good gender balance. Late in the year, we restructured our teams and the executives who lead them in order to better reflect our strategic priorities. During this process we achieved gender equity on the Executive Team — with 50 per cent female representation.
SIMPLE. SMART. SELECT.
The nonprofit sector provides a range of essential services including disability supports, settlement services and care for seniors. OPTrust Select was created specifically to meet the needs of employers and staff in the sector and is recommended by the Ontario Nonprofit Network. It is a pension benefit with modest contribution rates, designed to provide people in this sector with a steady stream of secure, reliable retirement income for life.
Too many people feel unprepared for retirement, leading to anxiety and decreased health. Our research shows about 50 per cent of Ontarians feel retirement is further away than it used to be. OPTrust Select will help alleviate the looming retirement crisis faced by so many.
With our strong governance model and risk sharing among over 96,000 other members, OPTrust Select members can plan on receiving stable, lifetime retirement income to supplement the retirement income they will receive from government sources and other retirement savings.
I am extremely proud to work with such an exceptional team that is committed to the members we serve every day. Collectively, we are focused on what matters most — retirement security today and decades into the future.
Our Plan continues to be sustainable as long as it delivers an appropriate and competitive benefit within an acceptable range of cost in the short, medium and long terms. The Plan continues to be fully funded, yet faces ongoing challenges.
The key drivers that impact Plan sustainability are:
- Investment Environment — The combination of global economic uncertainty, trade tensions and bond yields declining to record lows presents a challenge as it becomes increasingly difficult to maintain the Plan in balance without changes to contribution rates or benefit levels.
- Low Interest Rates that Reduce Expectations for Returns — The low interest rate environment continues to drive the discount rate assumption downward. The lower the discount rate the higher the pension obligation.
- Plan Maturity — As the number of retirees in our Plan increases and the proportion of members making contributions to the Plan decreases, our ability to address potential funding shortfalls diminishes.
- Longevity Risk — Members are living longer. This means it costs more to pay lifetime pensions.
OPTrust continues to address the challenge of Plan sustainability through our Member-Driven Investing strategy and our funding strategy. Plan sustainability is always top-of-mind and we study the headwinds facing the Plan and quantify the likely impacts of these factors over time.
Keeping the Plan fully funded over the long term begins with a thoughtful, prudent approach to Plan funding.
Our thinking on funding is rooted in the belief that sustainability matters. Members need to know they can count on their pension to be there when they retire. However, the need for sustainability before retirement also exists. We seek to enhance the likelihood that our members’ contribution rates and benefit levels will not fluctuate significantly throughout their working lives.
In past years our funding policy was comprised of three goals, which we seek to balance: benefit security, contribution rate stability and intergenerational equity, which means that every generation of members will pay a fair amount for the benefits they receive — not that every generation should pay the same contributions for the same benefit. With the introduction of OPTrust Select, we added a fourth goal: fairness between the primary schedule and OPTrust Select. Of all these goals, the security of accrued benefits is most important. As a Trust, it is essential we keep our commitment to members that they will receive the benefit for which they paid.
OPTrust engages independent actuaries to perform regular valuations of the Plan to ensure there are enough assets to meet the projected cost of members’ lifetime pensions. These valuations provide a snapshot of the Plan’s financial position and ability to meet its pension obligations, while providing a review of gains and losses experienced since the last valuation.
The Plan’s 2019 funding valuation shows the Plan remained fully funded as of December 31, 2019. The funding valuation also showed deferred (or “smoothed”) investment gains of $523 million, which will be recognized over the next four years and should further improve the Plan’s funded status in years to come.
The Plan’s real discount rate for the 2019 funding valuation was reduced to 3.10%, net of inflation, down from 3.15% in 2018. The effect of this change increased the total fund liabilities by $194 million.
SERVING OUR MEMBERS
Exceeding members’ expectations to deliver a remarkable experience remains a singular focus for us.
We live in the information age and know our members are inundated by information from many sources on a daily basis. As such, we are leveraging technology to get relevant information to our members when they need it most. From enrolment, through midcareer, to retirement we provide support on options to grow, maintain and collect pensions.
Our service transformation journey continued during the year, in parallel with a technology transformation that has so far delivered better tools for members. In June we released a refreshed secure online member and employer portal delivering a modern user experience, and accessibility for members across widely used mobile devices. This technology enhancement reinforces our commitment to provide members 24/7 access to useful tools and relevant information without being confined to a desk or constrained by our opening hours. In addition, the new technology allows us to continue introducing new features and desired functionality over time.
Members continued to be very satisfied with the services we provide, rating the service at an average of 9.2/10 in 2019. Members resoundingly reported that the team was respectful, courteous and helpful, despite challenges with transaction volumes and response times throughout the year. We do not take their compliments lightly and are working to make the experience remarkable every time. We’re also very pleased that we’ve been recognized as one of the top three pension plan administrators globally for service, according to an international benchmarking study by CEM.
Under the government’s Transition Exit Initiative, the team processed approximately 1,500 retirements and roughly 2,640 membership terminations, with a high degree of member satisfaction. As part of our continuous improvement culture, we enhanced selected benefit options statements to ensure our members have the information they need when crucial financial decisions have to be made.
Our administration team extends a warm welcome to OPTrust Select members and employers. Since inception, 28 new employers have joined OPTrust Select — the new schedule of benefits under the Plan, representing approximately 930 potential new members. We are pleased to be partnering with the nonprofit and charitable sectors in pursuit of broadening defined benefit coverage in Ontario.
Work with our employers continued to evolve and we are expanding our information partnership model to ensure members have relevant information, especially at enrolment and pre-retirement.
INVESTMENT STRATEGY AND PERFORMANCE
Our Member-Driven Investing (MDI) strategy is designed to carefully balance risk and return. We seek to earn the returns necessary to keep the Plan fully funded, while keeping benefit levels and contribution rates stable.
We invest with a total fund mindset and are committed to protecting the Plan’s funded status over the long term.
To ensure continued alignment with our Plan’s funding objectives, we are conducting a review of benchmarks and performance metrics.
We are long-term investors. Our actions in 2019 were designed to better position the portfolio through market cycles. Key accomplishments include:
- Enhanced our long-term strategic asset mix to make our portfolio more robust in the context of sustained lower returns, marginally reducing our risk of being underfunded
- Further balanced our portfolio risk by increasing exposure to assets that do well in market stress environments
- Internalized more assets to save costs and improve our ability to respond to changing market environments
- Maintained strong performance in our illiquid asset strategies; they continued to add diversification to our total fund and act as a partial inflation hedge.
To fulfill our MDI objectives, we divide our total fund assets into four categories: Liability Hedging Portfolio (LHP), Return Seeking Portfolio (RSP), Risk Mitigation Portfolio (RMP) and Funding Portfolio (FP). Each of these portfolios has a specific purpose in helping us deliver on our MDI objectives.
OPTrust’s responsible investing (RI) approach is rooted in our belief that environmental, social and governance (ESG) factors affect investment risk and return as well as our reputation. Our RI program ensures material ESG considerations are integrated into our investment decision-making processes and ownership practices to better assess and manage their impact on the Plan’s stability and sustainability.
As our RI program has grown and evolved, we have strengthened our ESG integration and developed our capabilities to measure and assess associated performance.
Climate change is one of the most complex and significant risks facing the world today. Ensuring that our portfolio remains resilient to the challenges it presents is an integral part of our investment mandate. OPTrust’s Climate Change Action Plan (CCAP) outlines our strategy to navigate climate change’s systemic risks and facilitate our transition into a low carbon economy.
Through 2019, we achieved progress across the CCAP’s four areas of focus. Accomplishments include:
DIVERSITY AND INCLUSION
Serving a membership as diverse as ours and investing in a global market means cultivating an environment that embraces diversity and inclusion in everything we do. We know diversity of thought, background, culture and perspective is critical to creating long-term value, which is why it has become a significant organizational priority for OPTrust.