Canada’s PSPP shifts focus to funding

One of Canada’s largest public pension plans has diverted its  immediate attention away from investments, and in particular new risk management tools, to solve its funding deficit issues. Amanda White spoke to PSPP’s plan board manager about their concerns.

The Public Service Pension Plan of Canada (PSPP) has slowed down discussions with its investment manager, Alberta Investment Management Co (AIMCo), regarding new risk management tools as the board grapples with a series of non-investment related issues, including its newly-emerged deficit status.

The C$5.2 billion (US$4.3 billion) defined benefit plan’s board met last week to discuss AIMCo’s new risk management tools, but according to the plan board manager, Lyn Andrews, has decided to slow down those discussions to allow its board to gain comfort in its understanding of markets and with AIMCo’s plans.

“The board recognises that AIMCo is the dedicated investment manager, by government appointment, so there isn’t a lot of choice. But the board still has an obligation to understand what AIMCo is introducing. It is a lay board so it is taking some time to get a handle on that,” she says.

All the plan’s investments are managed by AIMCo, which was formed as a crown corporation in January 2008 and is headed by Leo de Bever formerly of Ontario Teachers Pension Plan and the Victorian Funds Management Corporation
in Australia.

AIMCo manages a collective $54 billion on behalf of six public sector pension, endowment and special purpose funds, and the PSPP is the second largest pension plan in the AIMCo client mix, behind the $15 billion Local Authorities Pension Plan.

While the public plan is not immediately making investment policy changes, its investments are always front of mind, with studies showing that as much as 80 per cent of the plan’s funding is derived from its investment activity.

At the moment the asset mix is 5.5 per cent in cash and absolute returns; 20.5 per cent in bonds and mortgages; 56.5 in equities; and 18 per cent in inflation-sensitive investments; with AIMCo having the discretion to make decisions about tactical asset allocations within these ranges.

Despite market volatility, at its meeting last week the board decided not to undertake a comprehensive strategic asset allocation review but to stick with the scheduled review due next year.

According to Andrews, the board – made up of three employer and three employee representatives – is distracted by a number of other initiatives including a governance review, in conjunction with the government; monitoring the administrative and investment services offered by the Alberta Pensions Administration Corporation and AIMCo respectively; and completing its actuarial review.

Inopportunely for the board, its three-yearly review was due at December 31, 2008, and while not complete, the preliminary results indicate a funding deficit.

According to Andrews, funding that deficit is a priority for the board, with an increase in contribution rates the most likely answer.

“The three-yearly actuarial valuation was due at December 31, 2008 and the board is working out how to fund the deficit that has emerged,” she says. “The focus is on increasing contributions, we will have to adjust them but don’t know by how much.”

At the moment the plan is constrained by government when it comes to raising contributions rates, but Andrews says PSPP may contemplate meeting with government and stakeholders in the future regarding changes to its benefits.

The PSPP provides retirement benefits to employees of 28 participating employers including the Government of Alberta, five universities, four public colleges, provincial corporations and several government boards, agencies
and commissions with funding equally shared between plan members and employers.

At the time of the last actuarial review at the end of 2005, contributions went up, as they did in 2003.

From 2005 to 2007 the contribution rates on pensionable salaries up to the year’s maximum pensionable earnings increased from 6.17 to 6.69 per cent. For those over the maximum they increased from 8.81 per cent to 9.55 per cent. While still not certain about the amount of any increase, Andrews said the board was expecting to increase contributions.

At the time of the 2005 increase, service costs included changing demographics and the effect on the cost of pension benefits, the increases to overall costs of termination benefits due to higher member contribution rates, and the increasing investment management and administration costs resulting from investments in technological  advancements.

Funding levels have been the focus for a number of the large pension plans in Canada, as well as an agenda item for the Government, with the Ontario Expert Commission on Pensions, headed by Harry Arthurs, handing down its
recommendations earlier this year.

Issues relating to the funding of pension plans were at the core of the commission’s mandate and recommendations, with some stakeholders viewing the fate of Ontario’s pension system as dependent on ‘fixing’ the funding rules.

In addition, the Canadian Institute of Actuaries is looking at new disclosures, including setting best estimate assumptions.

Andrews says this would allow large plans to help determine surpluses to mitigate in times of losses. The board is also looking at a funding range before contributions have to change.

“A lot of funds are looking at the right sets of circumstances to take deviations,” Andrews says. “These are short term
fluctuations but the plan takes a much longer term view.”