After posting strong returns in the mid-2000s following the tech bubble, the Colleges of Applied Arts and Technology (CAAT) Pension Plan was hit hard in the 2008 global economic crisis, reporting a -21.7% net rate of return for that year. As a jointly sponsored pension plan with a governance structure that includes lay people, a knee-jerk reaction would have been understandable, but disastrous.
“[The Board of Trustees and Sponsors’ Committee] didn’t panic. Instead, they took a practical and pragmatic approach so as not to overreact,” recalls Derek Dobson, CEO and plan manager at CAAT. He credits the Board and the Committee’s carefully considered response from the plan’s bicameral governance—a structure that consists of two groups made up of employer and employee members who manage different aspects of the pension plan. It’s an approach that demands collaboration and, when done right, can lead to market-leading success. Since taking a hit in 2008, CAAT has rebounded strong, posting an average annual rate of return of 11%. The plan is also currently fully funded.
Governance overall
CAAT did not start out with a bicameral governance system. The plan was formed in 1967 by the Board of Governors of the Colleges of Applied Arts and Technology. It enacted governance changes in 1994 in an effort to gain more control over decisions about the direction of the plan and its investments. It was at that time that the plan governance expanded to include representatives from the Ontario Colleges Administrative Staff Association (OCASA) and college academic and support representatives from the Ontario Public Service Employees Union (OPSEU). These groups and Colleges Ontario signed a sponsorship and trust agreement that took effect in 1995. Since then, the plan has been managed by the independent, jointly trusteed pension board using a bicameral system.
Today, the plan serves more than 35,000 current and former employees of the college system in Ontario. It has $6 billion in assets and a $154-million surplus. In 2012, the plan saw more than an 11% rate of return—the fourth consecutive year of strong asset growth since the global credit crisis.
The inner workings
In the case of CAAT, the bicameral system comprises a Board of Trustees and a Sponsors’ Committee, explains Dobson. The Board is a 12-member group with fiduciary responsibility for the plan’s administration and investments. Six members are appointed by Colleges Ontario—the employer representative—and six from the employee representatives: two from OPSEU Academic, two from OPSEU Support, one from OCASA and one position that rotates among the employee groups.
The Sponsors’ Committee comprises eight people. Four employer members are appointed by Colleges Ontario, three employee members are appointed by OPSEU and one by OCASA.
“The Board has day-to-day oversight of the plan and its investments, while the Sponsors’ Committee looks at larger-picture issues to ensure that the plan is reaching its overall goals in benefits design and acceptable contribution levels,” he says.
So where does CAAT find so many engaged people willing to run a pension plan? Each sponsor uses a different approach, says Dobson. Colleges Ontario appoints individuals from inside and outside the college system. OPSEU uses an election and appointment process, and OCASA conducts interviews.
Typically, an appointment to the Board or the Sponsors’ Committee is for three years; however, members are not limited on how long they can stay involved. Some have been active since 1994, when the governance structure was being negotiated.
With some lay people involved in managing the plan, education is a major element to making the governance structure successful. One way the staff helps build this expertise is by ensuring
the content of any plan-related reports is written in a way that can be easily understood by a broad group of people.
But the sponsors do their part in educating Board and Committee members, too, offering programs on pension and fiduciary concepts. “Board members must also serve on one subcommittee, and there is one-on-one mentoring between current and former members,” says Dobson.
Facing challenges together
The keys to success for CAAT’s governance model are open communication and trust, Dobson says. “There’s an effort to understand one another’s perspective.
If you were to come into some of our meetings, you would have a hard time determining who was a union member and who worked on Bay Street—apart from the dress code, of course.”
The culture of trust that the Board and Committee have created internally and between themselves is rooted in frequent meetings. “According to plan documents, the Board only has to report once annually to the Sponsors’ Committee,” explains Dobson. “But CAAT’s Board co-chairs attend each of the five yearly governance meetings.” This collaborative spirit has helped the plan overcome the potentially cumbersome nature of a multi-layered governance model.
Following the 2008 financial crisis, the Board and Sponsors’ Committee responded by launching a funding task force (comprising employee and employer members from both the Board and the Sponsors’ Committee) in 2009. It wasn’t just the double-digit losses that were a concern, but the persistent low interest rate market and an increase in member life expectancy. These three pressures showed a looming deficit that the plan couldn’t ignore. The task force focused on investigating ways to address the expected funding deficit and to uncover ways to keep the plan financially healthy over the long term.
“The task force worked for more than a year to understand if the plan was sustainable and if the challenges were timing or structural,” says Dobson. “We initially thought substantial changes might be needed. However, working with actuarial support to run modelling for the plan, the task force discovered it was very much sustainable in its current form.”
The realization that did spark change was that members were living longer than assumed by prior plan calculations. On average, CAAT plan members are living to age 88—three years longer than previously expected. “What we were charging out to members and putting in reserves did not reflect how long they were living,” says Dobson. The result was an increased number of pension payments and, therefore, liabilities.
To address this, the task force recommended a 1.6% increase to the contribution rate to fund the increase to member life expectancy. It’s being phased in over three years to ease the financial burden on members and employers.
Dobson says he is continually impressed by the ability of the Board and Sponsors’ Committee to collaborate and highly values the bicameral approach to pension governance. “I think the checks and balances it provides are essential.”
Leigh Doyle is a freelance writer based in Toronto. leigh.doyle@gmail.com and managing editor of SmallBizAdvisor.ca