The pension commitment spans many decades. In keeping with that long-term time horizon, short-term market events, whether positive or negative, should not lead to contribution and/or benefit changes. Contributions and/or benefits should only be changed when economic conditions or member demographics and/or behaviours change the long-term expected cost of the benefit. In setting the funding policy, we seek to maintain a balance between four different goals: benefit security, contribution rate stability, fairness between the two schedules of benefits and intergenerational equity. Intergenerational equity 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. Of all these goals, the security of accrued benefits is the most important. It is essential we keep our commitment to members that they will receive their accrued benefits.

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. OPTrust’s 2021 valuation shows the Plan remained fully funded as of December 31, 2021. The funding valuation also showed deferred (or smoothed) investment gains of $2,461 million, which will be recognized over the next four years, further supporting the Plan’s funded status in the years to come. The Plan’s real discount rate for the 2021 funding valuation was reduced to 2.85 per cent, net of inflation, down from 3.00 per cent in 2020. The effect of this change increased the total fund liabilities by $668 million. Changes in the Plan’s actuarial assumptions can have a major impact on the projected cost of members’ pensions and the Plan’s funded status. The table shows the impact of a 0.5 per cent change in certain key assumptions on the Plan’s funded status.

• Retained our fully funded status and generated attractive returns despite a low-yield environment.
• Strong value creation in our private markets portfolios.
• Implemented systematic investment strategies that will help to mitigate risk in adverse market environments.
• Initiated small-sized investment in digital assets and will continue to explore this space.
• Developed measures to better assess the quality of decision making at various levels of our portfolio hierarchy.
• Completed a top-down assessment of the impact of climate change on our Plan sustainability.

TOTAL FUND PERFORMANCE

Our total fund portfolio delivered a net return of 15.3 per cent in 2021. Return-seeking assets were the largest positive contributor, while liability-hedging and risk-mitigating assets did not perform as well.

ASSET CLASS OVERVIEW

In alignment with our total portfolio approach, we divide our total fund assets into four sub-portfolios, each with a specific purpose, to help us achieve our MDI objectives: Liability Hedging Portfolio (LHP), Return Seeking Portfolio (RSP), Risk Mitigation Portfolio (RMP) and Funding Portfolio (FP).

• Liability Hedging Portfolio: The objective of the LHP is to help mitigate risks to the Plan’s funded status caused by changes in the liability discount rate. To do so, we hedge a portion of the Plan’s interest rate sensitivity by holding Canadian government bonds. These bond holdings also serve as the main source of funding liquidity for the Plan. We significantly reduced our allocation to bonds in 2020 as yields reached historical lows, while maintaining ample liquidity in the Plan.
• Return Seeking Portfolio: The RSP is composed of a diversified mix of risky assets and is the main return driver for the total fund. It includes public equity, private equity, credit, public market multi-strategy investments, real estate and infrastructure.
• Public Equity: Our public equity exposure is designed to complement our private equity strategy and generate returns using liquid market instruments. We obtain public equity exposure through internally managed cash and derivative positions, as well as using external managers. Our public equity portfolio is diversified across developed and emerging markets. Public equities contributed positively to total fund returns in 2021 led by strength in developed markets. Overall, our public equity portfolio delivered a net return of 12.9 per cent for the year.
• Private Equity: Private equity is expected to generate higher returns than public equity over the long term while providing a smoother volatility profile. Our private equity strategy, which focuses on buyout investments and lower-risk private equity and debt investments, allows us to identify a broad range of investment opportunities and execute upon those that offer the most attractive risk-adjusted returns. We invest directly into private companies, typically alongside partners and indirectly, through private equity funds.
• Credit: Credit investments provide attractive risk-adjusted returns and can help deliver stable cash flows for the total fund, allowing us to better fulfill our pension obligations.
• Multi-Strategy Investments: We invest in a wide range of liquid alternative strategies to access value-add opportunities within a broad and diversifying set of risk premia. These strategies, which are dynamic and generally less correlated with traditional market returns, increase resilience of the total fund portfolio to different economic and market environments.
• Real Estate: The real estate portfolio is an important diversifier for the total fund, lowering funded status volatility and providing predictable income to fulfill our pension obligations. Real estate can provide attractive risk-adjusted returns and is also a hedge against inflation over the long term.
• Infrastructure: Infrastructure investments add diversification to the total fund and act as a partial inflation hedge. They also provide cash flow and the potential for return enhancement through long-term capital growth.
• Risk Mitigation Portfolio:The assets/strategies within RMP are not expected to deliver high returns over the long term but are expected to enhance portfolio diversification and to mitigate risks associated with tail events. We hold U.S. Treasuries, safe-haven currencies, gold and trend-following strategies in the RMP, as they typically perform well in market stress environments.
• Funding Portfolio: This portfolio represents the net funding for the total fund, which allows us to manage our day-to-day liquidity and efficiently implement our desired asset mix. The Funding Portfolio includes exposures such as bond repurchase agreements, implied funding from our derivative positions, money market and liquidity reserves.

The investment environment in 2021 was characterized by a further pickup in economic activity following the COVID-19 shock, rising interest rates and inflation, against a backdrop of aggressive monetary and fiscal stimulus. An easing of lockdowns amid major progress on COVID-19 vaccinations has supported a return to a more stable growth path. However, healthy demand growth against continued supply bottlenecks has caused inflation pressure to increase, with interest rates and monetary policy expectations repricing to tighter settings toward the end of 2021.

Supply-demand imbalances, which were particularly acute in commodity markets, contributed to inflation pressures. Commodity prices rose significantly this year, with oil prices registering a 55 per cent rally — the largest since the Global Financial Crisis. Higher commodity prices helped support the Canadian dollar, which appreciated modestly against most major currencies. Alternative asset classes such as infrastructure and real estate have also performed well. Non-traditional assets, including digital assets, continued to see rapid growth and increased participation from institutional investors in 2021.

Despite potential interest rate and inflation risks, 2021 proved generally favourable for investment risk taking. Equities in developed markets did exceptionally well, while emerging markets were flat. Bond values declined drastically as yields jumped as much as 80 basis points for Canadian long-term bonds. This again highlighted the benefit of a diversified portfolio, through which we actively participated in the growth recovery while managing downside risk.