OPTrust’s investment return for 2016 decreased to six per cent, compared to its return of eight per cent in 2015.
Its 2016 funded status report, released on Monday, shows the fund outperformed its actuarially projected discount rate of 5.5 per cent. It also outperformed its benchmarks in its alternative asset classes, which are internally managed. Private equity earned 20.6 per cent, infrastructure yielded an 11.1 per cent return and real estate came in at 10.8 per cent.
“We had a strong year and reduced the amount of risk that we have in the plan,” says OPTrust president and chief executive officer Hugh O’Reilly.
Still, O’Reilly chose to emphasize the fact that the $19 billion OPTrust, which manages the OPSEU pension plan, remained fully funded on a regulatory filing basis for the eighth consecutive year.
“What matters most to ourselves and our members is the funded status of the plan,” he said. “So we are changing the conversation by changing the name of our filing from an ‘annual report’ to a ‘funded status report’.”
On a market value basis, OPTrust is 110 per cent funded, a slight improvement over 2015 when it was 101.1 per cent funded. The funding valuation confirmed deferred investment gains of $681 million, which will be recognized over the next four years.
“Our results mean that contributions and benefits will stay at current levels at least through 2020, which meets our goal of providing current benefit levels at current costs with a high degree of probability,” says O’Reilly. “We remain the only jointly sponsored plan with guaranteed indexing that is fully funded.”
In terms of demographics, OPTrust has an equal proportion of active and inactive members, even as the long-term decline in the ratio of active members to retirees continues. By law, the pension fund cannot decrease benefits if it sustains losses, with the sole alternative being to increase contribution levels.
“But we don’t want to be in the position of having to do that because it would put a heavier burden on our active members,” says O’Reilly.
OPTrust reduced its real discount rate from 3.55 per cent in 2015 to 3.4 per cent in 2016. The rate change increased fund liabilities by $502 million, adding greater conservatism to the its risk margins.
“This change reflects the expectation of lower long-term investment returns and reduces the risk of future losses due to investment returns falling short of the expected cost of members’ and retirees’ future pensions,” states the report.
OPTrust also diversified in 2016 by reducing its exposure to equity risks and increasing its exposure to absolute return strategies. The strategy follows the introduction in 2015 of OPTrust’s member-driven investment strategy, which focuses on harvesting different types of risk premium in a diversified manner.
“We see ourselves not as asset allocators but as risk allocators,” says O’Reilly. “Our goal is to balance the generation of short-term returns with the need to manage long-term risk effectively, and to seek stability rather than volatility.”