With pensions a growing concern for Canadians’ livelihoods, the public has a valid interest in knowing how they’re performing. And when it comes to public pension plans, they represent both a cost to taxpayers as well as a benefit many people will collect from at some point in their lives. But how far should public plans go in disclosing information about their activities, particularly around their investment decisions and performance?
In many cases, freedom of information laws exempt pension plans from access to information requests. Only the government agencies specifically listed in the federal Access to Information Act are subject to freedom of information requests, says Vincent Gogolek, executive director of the BC Freedom of Information and Privacy Association in Vancouver. So while Canadians can ask for details about the National Film Board and the Toronto Port Authority, they can’t sumbit requests under the act to the Canada Pension Plan Investment Board.
It was a similar story with the Ontario Retirement Pension Plan. While the Ontario government has now cancelled the ORPP in light of the recent agreement to boost the Canada Pension Plan, it specifically excluded the ORPP Administration Corp. from Ontario’s Freedom of Information and Protection of Privacy Act. In response to questions about the exclusion from Benefits Canada, a spokesperson for the information and privacy commissioner of Ontario pointed out other public sector pension plans, such as the Ontario Municipal Employees Retirement System, are also exempt from the act.
The Alberta Investment Management Corp., on the other hand, is subject to Alberta’s Freedom of Information and Protection of Privacy Act, and the federal Access to Information Act specifically lists the Public Sector Pension Investment Board as a Crown corporation, thus rendering it subject to the legislation. And change may be on the way. The Treasury Board of Canada Secretariat, Gogolek points out, is pushing for a legislative review of the act in 2018 that could involve subjecting more government agencies to it.
The transparency issue does, of course, have an impact on the amount of information available about the investment performance of a pension fund. The Canada Pension Plan Investment Board, for example, doesn’t disclose the returns on its investments in hedge funds.
“We do not break out our performance of our external portfolio management group separately,” Dan Madge, senior manager of media relations at the organization, told Benefits Canada in an email. “CPPIB provides disclosure that is appropriate given the long-term nature of our investment mandate. We provide extensive disclosure at the fund and asset class level.”
Hedge funds have, however, been an issue of concern recently over some pension funds’ complaints about poor performance and high fees. In September 2014, for example, the California Public Employees’ Retirement System scrapped its hedge fund program due to its “cost, complexity and risk.” And, in April 2016, the New York City Employees’ Retirement System moved to get rid of its hedge fund program, which was worth US$1.5 billion.
In the land of the free
South of the border, public pension plans tend to disclose more information. While the Canada Pension Plan Investment Board won’t specify its returns on its hedge fund investments, the State Teachers Retirement System of Ohio clearly stated in its annual report that it holds US$1.7 billion in hedge fund assets that saw an annualized return of minus 3.94 per cent for the year ending on March 31, 2016.
And when it comes to disclosure more generally, Boston College maintains the Center for Retirement Research, which tracks and makes available the funded status, asset allocations, employers’ annual required contributions, cash flow and other data for more than 150 public plans across the country.
And then there’s the fact that the vast majority of U.S. public sector pensions are subject to freedom of information requests, says Joshua Franzel, vice-president of research at the Center for State and Local Government Excellence in Washington. “The freedom of information laws are administered at the state level, and so [the states] are ultimately having the conversations of what records are publicly available and which ones are not,” he says. While New Jersey and Connecticut, for example, share pension payment information for plan members by name, Colorado mandates confidentiality for all member records.
How much transparency is too much?
“Transparency is a great thing in moderation,” says Leo de Bever, a pension and investment consultant and the former chief executive officer at AIMCo.
While both plan members and Canadians at large have the right to know about public pension plans’ finances, de Bever suggests excessive disclosure can hamper their ability to maximize returns.
“If you have a board meeting and your competition for an investment knows right away, even before you have a chance to execute what you’re up to, that is a very, very serious handicap,” says de Bever. “No listed company would do that. They would do their due diligence on an investment, they would make the investment and when they are ready to pull the trigger, if it’s something that needs disclosure because it affects shareholder valuation of the company, they will disclose it. But otherwise, they don’t.”
Bob Baldwin, a pension consultant in Ottawa and a former member of the board of directors of the federal Public Sector Pension Investment Board, sees the issue somewhat differently.
“Because [public plans] are significant items of public expenditure and some of them are substantial financial institutions in their own right . . . the general rule should be divulge unless there’s a good reason not to,” he says.
Some of the most important information released to the public domain, Baldwin says, includes financial risk analyses. “It should entail . . . the probability of having to make adjustments to the contributions or the benefits provided under the plan,” he says. “That’s the key thing.”
For Jim Leech, a pension consultant and former chief executive officer of the Ontario Teachers’ Pension Plan, what’s most crucial is for plans to reveal their funded status so members and pensioners know how secure their retirement will be. But when it comes to revealing its investments, Ontario Teachers’ only discloses assets over $150 million in its annual reports.
“Frankly, we’re not going to spend an awful lot of time talking about a $10,000 investment in a $170-billion fund,” says Leech. He also cautions that quarterly or even annual reports aren’t always helpful. “Pension plans are long-term vehicles, and what you don’t want to get caught up in is a whole bunch of short-term thinking.”
Indeed, behavioural economics research suggests humans prioritize short-term circumstances, says de Bever. “It probably relates back to the fact that, 200,000 years ago, it was more important to outrace whatever was chasing you at any given time than what was going to happen next year.”
If annual reports say one plan’s returns are a few percentage points higher than another’s, the plans could still have similar risk-adjusted results. After all, longer-term strategies and asset mixes can have a significant impact on rates of return. So instead of annual reports, de Bever says it would be more beneficial to report returns on a four- or eight-year horizon.
“Now that we have gotten past the necessity of trying to outrace whoever is trying to kill us, we should probably be focused on the longer-term benefits that pension plans have in terms of making investments . . . because that’s where the superior returns are.”
Besides the volume of disclosure, there are also questions about the quality of what pension funds reveal and the assumptions used in calculating their numbers. For his part, Malcolm Hamilton, a senior fellow at the C.D. Howe Institute in Toronto, says the “defining disclosure” issue is the value of a plan’s liabilities using market interest rates. He compares defined benefit pension plans to bonds, since both promise repayment.
“. . . We should look at how markets value bonds and take that same methodology and apply it to guaranteed pension liabilities,” he says. “And that would mean discounting the liabilities not at the return you expect the pension fund to earn, because that’s not a guaranteed return.”
Instead, he suggests plans should discount liabilities on the return possible to earn on a portfolio of high-quality bonds that would make future payments equal to what they’ve promised to their members.
If a plan uses that calculation, liabilities become much larger and annual reports look less impressive. As a result, most Canadian plans don’t disclose liabilities using market interest rates, says Hamilton.
Another issue, he adds, is the difficulty of calculating the value of real estate and other illiquid assets. “These are shares in something that’s private and doesn’t trade, and the only way to really know what it’s worth is to put it up for sale and have a bit of an auction and see what people will offer for it. But, of course, it’s impractical to do that at the end of every year so you know what your assets are worth.”
Therefore, he says, annual reports often include estimated values for illiquid investments that are difficult to compare to other plans’ returns.
When transparency becomes ‘voyeurism’
When Baldwin served on the board of the Public Sector Pension Investment Board from 2000-11, he primarily saw access to information requests involving executive compensation, a pattern de Bever also observed at AIMCo.
“The contentious stuff tended to be almost voyeurism,” he says. “People wanted to know stuff simply because they wanted to know, and [it] had nothing to do with whether this was actually good, bad or indifferent for the outcome for AIMCo.” The public, according to de Bever, didn’t file requests about the often-hefty fees paid to external investment consultants but paid a lot of attention to in-house investment managers’ more modest salaries. In his view, executive salaries aren’t the main issue when it comes to the success of a plan.
“If the object of your organization is to maximize the return on pension assets and if that minimizes any kind of involvement from taxpayers, then you should focus on the governance aspect of it, not on the gory details.”
Sara Tatelman is an associate editor at Benefits Canada.
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