As Canada’s top public pension plans issue their annual investment results, OPTrust aims to change the conversation about pension health and focus on a totally different metric – funded status.
Eschewing the usual annual report format in favour of a “Funded Status Report,” they’re stepping out of the annual horse race where public plans compete for the best investment returns.
By that measure, OPTrust is doing very well – it remains fully funded at 100.1%, a number that allows the plan to address challenges like its 1:1 ratio of active to inactive members.
And that’s what counts. As OPTrust President and CEO Hugh O’Reilly explained to me in an interview last week, “The only measure that matters is the one that matters to members – our funded status.”
Plan sponsors already know that a plan’s funded status is what matters.
Year-over-year returns might make great headlines – but they don’t mean much when it comes to the health of a pension plan. Annual investment returns don’t tell you if a plan can handle a major market downturn. They also don’t tell you if a plan will still be open or paying out pensions in five or ten years.
The fact that every pension plan is different, with members at varying ages and stages, makes annual investment returns an even more useless measure. In the case of OPTrust, the plan’s membership is aging and very sensitive to major market losses. “Our active members bear any loss,” said O’Reilly. “This fact has had a profound effect on how we take risk in our investment strategy.”
OPTrust’s 6% return reflects a big reduction in public equities last year – a move meant to manage risk and maintain funded status. So while returns didn’t shoot the lights out, they did were they were supposed to: keep that funded status stable.
“Our whole strategy is to make sure we are managing risks. We are not asset allocators: we are risk allocators,” O’Reilly explained to me. “We need to get paid for the risks we take.”
I applaud OPTrust’s approach – full disclosure, we at Canadian Investment Review have over the last few weeks blasted out headlines focused on investment returns. And it’s bugged a few readers I know (I’ve had a few emails!).
Maybe it’s time to rethink our headlines – the more we focus on year-over-year returns in the media, the more we encourage and support an investment industry that is already way too focused on short-term returns.
Think of it as part of a larger conversation about short-termism and its negative impact on the global economy and even our planet.
Dominic Barton and Mark Weisman have just put a price tag on how much short-term thinking is costing our companies – I wrote about it here.
Maybe it’s time for us to stop back-patting pension funds for short-term performance and to start reporting on whether or not our public pension funds are actually sustainable. After all, if we want long-term thinking in our economy and our markets, the conversation needs to change.
It’s time for funded status to rise out of the back pages of annual reports and hit page one.