REFLECT. REINVENT. REINVIGORATE ANNUAL REPORT

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1 REFLECT. REINVENT. REINVIGORATE ANNUAL REPORT

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3 TABLE OF CONTENTS Section One: Our Journey 8 Section Two: Governance 15 Section Three: About the Plan 20 Section Four: About the Fund 27 Section Five: Looking Ahead 36 Glossary 38 Financials 40 You can make a note of interesting facts or questions on our notes page at the end of the document.

4 26,813 ACTIVE MEMBERS GENDER PROFILE ACTIVE MEMBERS 20,636 PENSIONERS 7,876 INACTIVE MEMBERS FEMALE 68% MALE 32% 1.29 ACTIVE MEMBERS FOR ONE RETIREE ACTIVE MEMBERS BY AGE 1,213 NEW PLAN MEMBERS IN MEMBERS OVER 100 YEARS OLD < >55 2% 17% 26% 36% 19% 1,104 NEW PENSIONERS 1,162 ACTIVE MEMBERS ELIGIBLE TO RETIRE BASED ON PRE-REFORM RULES 31,000+ ANNUAL PENSION STATEMENTS SENT TO MEMBERS 2,521,673 RECORDS DIGITIZED

5 $18,270 AVERAGE ANNUAL LIFETIME PENSION 40 PARTICIPATING EMPLOYERS $62,792 AVERAGE PENSIONABLE EARNINGS OF ACTIVE MEMBERS AVERAGE AGE OF ACTIVE MEMBER AVERAGE YEARS OF SERVICE AT RETIREMENT AVERAGE AGE AT RETIREMENT AVERAGE AGE OF PENSIONER % $ % GROSS INVESTMENT RETURN IN 2017 BILLION NET ASSETS AVAILABLE FOR BENEFITS FUNDED RATIO

6 Letter from the Chair of the Board On behalf of the Provident 10 Board of Directors, I am honoured to present the 2017 Annual Report. The Public Service Pension Plan is the largest public-sector pension plan in Newfoundland and Labrador, with over 55,000 plan members. I m proud to Chair our Board as we oversee the Corporation during these early days. The Board has worked diligently this year to guarantee we follow strong governance practices, strengthen our relationship with the executive leadership team and staff, and to ensure a strong return on our investments all with the goal of improving the sustainability of the Plan. In Fall 2017, our attention turned to the evolution of our service delivery. Together, the Board and the executive leadership team started working on our Strategic Plan. This three-year strategic plan establishes the executive leadership team and Board s joint commitment to building an organization that remains focused on planning for the security of plan members futures and identifies our short- and medium-term goals for improving service delivery for plan members. I would like to take this opportunity to thank the Board for their support, dedication, and contributions throughout I look forward to continuing our work in 2018 and beyond, as we implement our plans to build secure futures for plan members. I would also like to acknowledge a change in Board membership in Last year, we welcomed Emilian Groch and Denise Hamilton to our Board. Emilian and Denise both have extensive knowledge of the pension industry and valuable expertise to share. As we welcome Emilian and Denise, we say good-bye to Gail Hamilton and Noel Andrews. I d like to extend my thanks to Gail and Noel for their dedication and service to the Board and the Corporation during their tenure. Their contributions played a significant role in our successful transition, for which we owe them many thanks. To the Provident 10 employees, thank you for your significant contributions during the 2017 transition year. Your efforts have been critical to our success and are appreciated. Burt Blundon Chair of the Board

7 Letter from the CEO I m very pleased to share with you our 2017 Annual Report. The past year has been one of tremendous change for Provident 10 as we transitioned to an independent pension organization. In addition to our transition from Government, we announced our new name and settled into our new office space. By maintaining a focus on our people, our processes, and our technology, we met many milestones, faced challenges head on, and have come a long way in our first year of operation. Now is the time for us to reflect, reinvent, and reinvigorate. Through reflection we celebrate our successes and learn how we can continue to evolve. Pension reform has reinvented the Public Service Pension Plan, allowing us to reinvigorate the Plan with new energy for a bright future. The future is indeed bright. Development of our Strategic Plan is well underway and we have started implementing our plans for We are more focused than ever on plan members and providing the level of service they expect and deserve. To do that, we are implementing targeted service standards and are adjusting our processes to meet these new standards. Favourable market conditions fuelled continued growth in plan assets during Both our invested assets and net assets available for benefits increased and we saw a 9.8% gross investment return, helping to improve long-term sustainability for the Plan. To my colleagues at Provident 10, my sincere gratitude for your amazing work and dedication throughout We have achieved a lot together in a short amount of time and I m confident we will continue to do so. Chuck Bruce CEO

8 SECTION ONE

9 OUR JOURNEY THE EVOLUTION OF PUBLIC SERVICE PENSION REFORM IN NEWFOUNDLAND AND LABRADOR IN SEPTEMBER 2014, THE GOVERNMENT OF NEWFOUNDLAND AND LABRADOR (GOVERNMENT) AND THE FIVE UNIONS (THE UNIONS) REPRESENTING EMPLOYEES OF THE PUBLIC SERVICE PENSION PLAN (PSPP OR THE PLAN) ANNOUNCED THE PENSION REFORM AGREEMENT, ENHANCING THE SUSTAINABILITY OF THE PLAN WELL INTO THE FUTURE. For the first time, an independent corporation would administer the PSPP and manage the investments of the Public Service Pension Plan Fund (the Fund). After years of hard work and input from the Government and the Unions, today Provident 10 is that corporation. Our name and brand, Provident 10, not only distinguishes us from Government, but is also a departure from usual naming practices in the pension industry. pro-vi-dent adjective Making or indicative of timely preparation for the future. MEMBER UNIONS THE ASSOCIATION OF ALLIED HEALTH PROFESSIONALS (AAHP) THE CANADIAN UNION OF PUBLIC EMPLOYEES (CUPE) THE INTERNATIONAL BROTHERHOOD OF ELECTRICAL WORKERS (IBEW) THE NEWFOUNDLAND AND LABRADOR ASSOCIATION OF PUBLIC AND PRIVATE EMPLOYEES (NAPE) THE REGISTERED NURSES UNION NEWFOUNDLAND AND LABRADOR (RNUNL) 9

10 OUR ROAD TO INDEPENDENCE Pension Reform Agreement announced On September 2, 2014, Government and the Unions representing employees of the PSPP announced the Pension Reform Agreement. Joint Sponsorship Agreement Signed Board of Directors appointed and PSPP Fund carved out On March 31, 2015, the Public Service Pension Plan Corporation (PSPPC) was established, the Board of Directors was appointed, and the assets of the Fund were legally separated from the Newfoundland and Labrador Pooled Pension Fund. Chief Executive Officer appointed PSPP Fund asset mix refined Executive leadership team recruitment initiated PSPPC rebranded as Provident A Joint Sponsorship Agreement (JSA) was signed between Government and the Unions to establish the principles of the Joint Trusteeship, including the Funding Policy and the Trustee Corporation Framework for the establishment of an independent corporation to administer the Plan and manage the investments SEP DEC MAR JAN APR OCT JAN We wanted a name truly representative of who we would be for the people most important to us our plan members, our plan sponsors, and our employees. The 10 is a reference to Newfoundland and Labrador s place as the tenth province to join Canada. Our brand, and its sense of trust, strength, and dependability, is the foundation of who we are and why our team comes to work every day. Many of our employees have joined us from the Pension Administration Division of Government, after we successfully negotiated a collective agreement with the Newfoundland and Labrador Association of Public Employees. Their expertise and years of experience in administering the PSPP have ensured not only a smooth transition, but also the best possible service to plan members. Additional members of our team were recruited from private industry for positions in pension administration, investment, finance and accounting, systems and quality, and corporate administration. While working on recruitment, we were also executing on a cloud-first technology and systems strategy to migrate and upgrade our pension administration system and data, digitize member records, and build our corporate network infrastructure. The final step in our journey to independence was realized when we moved into our new offices. Designed specifically for our needs, our new home offers room for our growing organization, with space that encourages collaboration and teamwork, while providing the privacy necessary to focus on plan members. 10 Transitioned to operational independence We moved into new offices, and launched segregated systems and infrastructure ANNUAL REPORT APR April 1, 2017, marked our official transition to an independent pension organization, a significant milestone and turning point for the PSPP.

11 GETTING BETTER EVERY DAY POST-TRANSITION, WE HIT THE GROUND RUNNING. WITH OUR MOVE TO OPERATING AS PROVIDENT 10, WE TURNED OUR FOCUS TO OUR PEOPLE, OUR PROCESSES, AND OUR TECHNOLOGY. WE IMPLEMENTED NEW PROCESSES THAT LEVERAGED OUR TECHNOLOGY INVESTMENTS. WE CONCENTRATED ON COMPLETING THE DIGITIZATION OF OUR REGISTRY AND HISTORICAL DOCUMENTATION. WE PROVIDED EDUCATION AND TRAINING FOR OUR TEAM MEMBERS TO ENSURE THEY UNDERSTOOD OUR NEW PROCESSES AND HAD THE TOOLS NECESSARY TO SERVE PLAN MEMBERS. PEOPLE TECHNOLOGY PROCESSES The 2016 Annual Pension Statements were sent to plan members in June Leading up to this mailing, we developed new quality control practices to benefit plan members. 11

12 To ensure the accuracy of pension statements, we implemented more than 70 new validation protocols. These new validation protocols screened the data of more than 34,000 plan members, giving us the opportunity to correct and strengthen our data. With the Annual Pension Statements, we shared our first newsletter with plan members bearing the Provident 10 brand. It covered our new brand and story, as well as an update on our investment strategy and performance, letting plan members know their future is in good hands. To further improve our service we asked participating employers for their feedback on what had worked well in the past and where we could evolve. The survey was instrumental in shaping our member services delivery model, especially our new website. The website was launched in December 2017 and includes important information about Provident 10 and the PSPP for plan members, participating employers, and other stakeholders. Through provident10.com, visitors can access the pension calculator, the Plan Booklet, investment information, the latest Provident 10 news, and information tailored to active members, participating employers, and pensioners. Our website is updated regularly with new information and resources to better serve plan members and participating employers. visit our website at: provident10.com Community Involvement WE BELIEVE IT IS IMPORTANT TO GIVE BACK TO THE COMMUNITY. IN 2017, OUR EMPLOYEES PARTICIPATED IN THREE COMMUNITY EVENTS: Volunteered with Ronald McDonald House Home for Dinner Program Organized a community clean-up Participated in the St. John s Terry Fox Run ANNUAL REPORT

13 You can rest assured today because we re focused on your tomorrow.

14 WHAT S IMPORTANT TO US? OUR PILLARS ARE THE PRINCIPLES UPON WHICH PROVIDENT 10 WAS FOUNDED AND WILL GUIDE US AS WE WORK TOWARD DELIVERING BEST-IN-CLASS SERVICE AND RESULTS. HIGH STANDARDS We set the quality bar high for ourselves because we know that our members rely on us for peace of mind. TEAMWORK Our success comes from a team approach. We always help and support each other because we ll get better outcomes for our members. VISION We are always thinking about tomorrow. Not only do we focus on success today, we look for smarter, better ways to succeed tomorrow. CUSTOMER-FOCUSED We are responsive and responsible to our members and stakeholders, so they can always trust us. ACCOUNTABLE Not only will we measure what we do, we will learn and act upon new understandings to always improve our level of service ANNUAL REPORT

15 SECTION TWO 15

16 GOVERNANCE GOOD GOVERNANCE PRACTICES, WITH CLEARLY DEFINED ROLES AND RESPONSIBILITIES, ARE KEY TO SUCCESS IN PENSION MANAGEMENT. WE OPERATE IN A JOINT TRUSTEE GOVERNANCE STRUCTURE WITH EQUAL SHARING OF COSTS, RISKS, AND DECISIONS BETWEEN GOVERNMENT AND THE UNIONS. OUR GOVERNANCE STRUCTURE INCLUDES THREE GROUPS AS PRESCRIBED IN OUR JOINT SPONSORSHIP AGREEMENT (JSA): 1. BOARD OF DIRECTORS 2. SPONSOR BODY 3. EXECUTIVE TEAM BOARD OF DIRECTORS We are governed by a Board of Directors (Board), which is comprised of 14 people, appointed as follows: The Board has overall responsibility for pension administration, corporation management, actuarial reporting, and investment management. It acts independently of the Sponsor Body and executive leadership team, and makes decisions in the best interest of plan beneficiaries. There are three sub-committees comprised of Board members that play an advisory role to the Board: the Audit and Finance Committee, the Investment Committee, and the Governance and Human Resources (G&HR) Committee. The Investment Committee also includes two additional Board-appointed investment experts. SIX GOVERNMENT APPOINTEES SIX UNION APPOINTEES ONE NON-UNION APPOINTEE ONE INACTIVE MEMBER APPOINTEE ANNUAL REPORT

17 Audit & Finance Committee The Audit and Finance Committee advises the Board on financial reporting, accounting systems, and internal controls. They review the annual financial statements, recommend and support internal accounting policies, and develop a management profile for risk assessment. Investment Committee The Investment Committee advises the Board on the investment management and oversight of the Fund. They provide guidance on, and monitor implementation of, investment policies, strategies, and mandates. They also review total fund and investment manager performance. Governance & Human Resources Committee The G&HR Committee advises the Board on best practices with regards to matters of governance and human resource policy, procedures, and practices. They provide guidance on corporate governance and ethics, executive review and compensation, and corporate communication policies and practices. 17

18 BOARD OF DIRECTORS' COMMITTEE MEMBERSHIP NAME AUDIT & FINANCE INVESTMENT G&HR Bert Blundon (Board Chair) ex-officio, non-voting ex-officio, non-voting ex-officio Loyola Sullivan (Board Vice-Chair) ex-officio, non-voting ex-officio, non-voting ex-officio, non-voting Randell Earle chair Mary Galway Emilian Groch Denise Hamilton David Jones chair Douglas Laing Dawn Learning Ann Marie Miller Fred Murphy Jocelyn Perry Pamela Toope chair John Vivian SPONSOR BODY The Sponsor Body is comprised of individuals representing Government, the Unions, non-union employers, and pensioners. They are responsible for oversight of the JSA. Their primary responsibility is to make decisions regarding changes in plan benefits. They also approve the assumptions used in actuarial valuations and direct the level of risk appropriate for the Fund s asset mix. EXECUTIVE LEADERSHIP TEAM The CEO and executive leadership team are responsible for all operational matters, implementation of strategic plans and policies, and the general supervision of corporate affairs. Chief Executive Officer: Chuck Bruce Chief Investment Officer: Natasha Trainor Vice President, Finance: Judith Bullen Vice President, Systems & Quality: Mark Stanford Vice President, HR & Administration: Peter Head Our executive leadership team is supported by a group of talented individuals with expertise across our five departments. Regardless of role, our employees' work is always focused on servicing the current and future needs of our plan members ANNUAL REPORT

19 THE PARTIES TO THE JOINT SPONSORSHIP AGREEMENT GOVERNMENT AND MEMBER UNIONS GOVERNANCE PROVIDENT 10 BOARD OF DIRECTORS SPONSORSHIP SPONSOR BODY MANAGEMENT CEO, EXECUTIVE LEADERSHIP TEAM, AND INDIVIDUAL CONTRIBUTORS OUR BOARD OF DIRECTORS Top Row (L-R): Randell Earle, David Jones, Jocelyn Perry, John Vivian, Mary Galway, Fred Murphy, Pamela Toope Bottom Row (L-R): Bert Blundon, Dawn Learning, Emilian Groch, Loyola Sullivan, Douglas Laing, Anne Marie Miller, Denise Hamilton 19

20 SECTION THREE ANNUAL REPORT

21 ABOUT THE PLAN THE PSPP IS A DEFINED BENEFIT PENSION PLAN, DESIGNED TO PROVIDE A SECURE, LIFETIME RETIREMENT INCOME TO ITS PLAN MEMBERS. PSPP PLAN MEMBERS AND PARTICIPATING EMPLOYERS CONTRIBUTE EQUALLY TO THE PLAN, AND THESE CONTRIBUTIONS ARE COLLECTIVELY INVESTED AND MANAGED BY EXTERNAL INVESTMENT PROFESSIONALS TO GENERATE INVESTMENT INCOME TO SUPPORT THE PLAN S BENEFITS. As a PSPP plan member, your pension is determined using a formula based on your eligible earnings and years of service in the Plan and allows for pension payments that start at various retirement ages. Your pension from the PSPP is an important portion of your retirement income, which includes income you may receive from the Canada Pension Plan (CPP), Old Age Security (OAS), and other personal savings. $62,792 AVERAGE PENSIONABLE EARNINGS OF ACTIVE MEMBERS 21

22 WHAT CHANGED WITH PENSION REFORM? The Pension Reform Agreement, and subsequent JSA signed by Government and the Unions, enhanced the future sustainability of the PSPP. Government no longer guarantees pension funding shortfalls, but rather the future deficits and surpluses of the Plan are shared equally by the plan sponsors. As part of the agreement, Government provided a $2.685 billion promissory note and the Unions agreed to several plan changes including increased contribution rates and plan design changes. These changes, which took effect on January 1, 2015, contributed to improving the financial health of the Plan and are summarized in the table below. PLAN CONDITIONS Unreduced Early Retirement Reduced Early Retirement Earnings Formula in Pension Calculation Indexation in Retirement PRE-REFORM RULES (UP TO DECEMBER 31, 2014) Age 55 with minimum 30 years service Age 60 with minimum 5 years service Age 55 to 60, Age + years of service > 85 or Age 50 to 55, with minimum 30 years service or Age 55 with minimum 5 years service Best Average Earnings (BAE) based on 5 years service Annual pension increase equal to 60% of the national Consumer Price Index (CPI), to a maximum annual increase of 1.2% if applicable from age 65. POST-REFORM RULES (AS OF JANUARY 1, 2015) Age 58 with minimum 30 years service Age 60 with minimum 10 years service Age 65 with minimum 5 years service Age 58 to 60, Age + years of service > 88 or Age 53 to 58, with minimum 30 years service or Age 55 with minimum 5 years service BAE based on 6 years service (frozen BAE 5 as at December 31, 2014 on pre-reform service) Indexing on future service suspended (no impact on current retirees) A five-year transition period in respect of the changes in retirement criteria was put in place on January 1, 2015, for members of the Plan as at December 31, The PSPP Plan Booklet provides detailed information on the plan benefits, retirement eligibility, pension calculation formula, and transition period, and can be found on our website, provident10.com ANNUAL REPORT

23 CONTRIBUTIONS Every pay period, plan members contribute a percentage of their earnings into the Plan, and these contributions are matched by participating employers. Plan members contributions as percentage of pensionable earnings are as follows: FIRST $3,500 OF EARNINGS 10.75% $3,501 TO YMPE 8.95% ABOVE YMPE 11.85%, The YMPE is the Year s Maximum Pensionable Earnings, which is an amount defined under the CPP. In 2017, this amount was $55,300 THE PENSION FORMULA The pension formula is important to understand as it defines how your benefits are calculated. To determine your annual pension, the following formula uses your years of service and the average of your best six years of earnings: YOUR BEST AVERAGE EARNINGS OVER SIX YEARS X YOUR YEARS OF PENSIONABLE X 2% SERVICE 23

24 WHAT IS AN ACTUARIAL VALUATION? An actuarial valuation is a mathematical analysis that reports on the financial health of a defined benefit pension plan. It helps determine the Plan's ability to pay out all the benefits promised to plan members by assessing the funded status of the Plan. This can be expressed in dollar terms (funded status) or percentage terms (funded ratio). An actuarial valuation is performed by an independent actuary (a professional with specialized training in financial modelling, mathematics, probability, statistics, and risk). It provides valuable information for decision-makers, such as the Board and the Sponsor Body, to assess the long-term sustainability of the Plan. ASSETS HOW MUCH MONEY IS IN THE PLAN? LIABILITIES HOW MUCH MONEY IS NEEDED TO PAY THE = BENEFITS PROMISED? FUNDED STATUS SURPLUS OR DEFICIT? ASSUMPTIONS USED IN AN ACTUARIAL VALUATION In conducting an actuarial valuation, many future events must be assumed or predicted. Some examples of these assumptions include: HOW LONG WILL PLAN MEMBERS WORK? WHAT LEVEL OF SALARY INCREASES WILL PLAN MEMBERS RECEIVE? WHAT AGE WILL PLAN MEMBERS RETIRE? HOW LONG WILL PENSIONERS LIVE? WHAT RETURN WILL THE PLAN ASSETS EARN ON INVESTMENTS? An actuarial valuation looks at the funded status in two ways going-concern and solvency. We focus on the actuarial valuation prepared on a going-concern basis as the expectation is that the PSPP will continue indefinitely into the future. The plan actuary works with the Board and Sponsor Body to determine the primary assumptions to be used in the PSPP actuarial valuation ANNUAL REPORT

25 HOW THE PLAN S FUNDED RATIO IS CALCULATED The ratio of the Plan s assets to liabilities is known as the funded ratio. The funded ratio is a measure of the Plan s financial health and is an important focus for the Board. Based on the Plan assets of $9.341 billion on December 31, 2017, which includes the promissory note from Government, and the Plan s liabilities of $9.737 billion, the PSPP funded ratio at year-end was 96%. If the funded ratio is LESS than 100%, the Plan assets are not sufficient to fund the future liabilities. In this case, the Plan is in a Deficit position or has an Unfunded Liability. If the funded ratio is GREATER than 100%, the Plan has more than enough assets to fund the future liabilities. If this is the case, the Plan is in a Surplus position. THE FUNDING POLICY Under the PSPP governance structure, the Sponsor Body is responsible for setting the Plan s benefit levels and contribution rates, while the Board is responsible for managing the Plan s assets and administering benefits. The PSPP Funding Policy is designed to guide the Plan to full funding by 2042 and lays out defined thresholds that must be met before the Sponsor Body can implement plan design changes. The Funding Policy sets minimum and maximum funded ratio levels at three-year intervals. This coincides with the regular three-year actuarial valuation filing period, as required by pension regulation. If the funded ratio falls below the minimum ratio identified in the Funding Policy, then the Sponsor Body must take corrective action to restore the funded ratio. If the funded ratio moves above the maximum ratio identified, then the Sponsor Body can make plan changes such as adjusting contribution levels or the pension calculation formula. $ 9.341B ASSETS $ 9.737B LIABILITIES 96% FUNDED RATIO 25

26 PLAN MEMBERSHIP The Plan covers over 55,000 plan members, who can be categorized into the following groups: ACTIVE MEMBERS Plan members currently working for a participating employer and actively contributing to the Plan. PENSIONERS Plan members currently receiving a pension, including those who have retired, those who are receiving a survivor pension, and disabled plan members. INACTIVE MEMBERS Plan members who have left full-time employment, but retain an entitlement under the Plan. MEMBERSHIP BY THE NUMBERS 26,813 ACTIVE 20,636 PENSIONER 7,876 INACTIVE BENEFITS OF THE PLAN CONTRIBUTIONS MATCHED EQUALLY BY EMPLOYER CONTRIBUTIONS MANAGED BY PROFESSIONAL, EXPERIENCED INVESTMENT MANAGERS A PREDICTABLE LIFETIME RETIREMENT INCOME SURVIVOR BENEFITS FOR LOVED-ONES ANNUAL REPORT

27 SECTION FOUR 27

28 ABOUT THE FUND TO PROVIDE MEMBERS WITH STEADY AND PREDICTABLE INCOME DURING RETIREMENT, THE PROVIDENT 10 INVESTMENT TEAM CAREFULLY IMPLEMENTS AND MANAGES THE INVESTMENT STRATEGY APPROVED BY THE BOARD. Our investment objectives, beliefs, strategy, and asset allocation are described in the Statement of Investment Policies and Procedures (SIP&P). The SIP&P also addresses other key matters, including our rebalancing policy, permitted types of investments, risk management controls, conflict of interest policies, and monitoring procedures. The Board reviews and approves the SIP&P at least once annually in consultation with the Investment Committee and the Investment Team. The most recent version was approved by the Board in September The investment strategy is designed to maximize returns within an acceptable level of risk to meet our pension obligations. We invest contributions in a well-diversified portfolio of both public and private market investments, providing steady returns at low volatility levels. ASSET MIX The strategic asset mix is one of the most important factors in our investment strategy as it has the largest influence on long-term performance. To design our asset mix strategy, we periodically undertake asset liability modeling studies (ALM Study) to understand the Plan s liabilities, risk tolerance, and long-term return requirements. The ALM Study examines the impact on long-term funded status from various combinations of investments and asset ANNUAL REPORT

29 classes using estimates of risk, return, and correlations to other types of investments. Asset classes are generally divided into two broad categories: liability matching assets and return seeking assets. Liability matching assets are expected to exhibit similar sensitivity to economic conditions as the Plan s liabilities, while return seeking assets are expected to improve returns and hence improve the affordability of the Plan. The ALM Study ultimately helps us establish the optimal balance of risk and reward for plan members across all types of investments, giving due consideration to the Plan s liabilities, implementation matters, and cost. In early 2015, we conducted the first ALM Study for the PSPP Fund as an entity independent from Government. We worked with our investment consultant and plan actuary to establish a strategic asset mix that was approved by the Board in June This was viewed as the first step in a multi-year journey to achieve long-term financial sustainability for the Plan, and resulted in a target asset mix that is allocated among three broad categories: Equity, Fixed Income, and Real Assets. EQUITIES EQUITIES FORM THE BASE OF THE RETURN-SEEKING PORTION OF THE FUND AND DELIVER LONG-TERM ASSET GROWTH AND DIVIDEND INCOME. FIXED INCOME FIXED INCOME INVESTMENTS PROVIDE MORE STABLE INVESTMENT INCOME AND ACT AS A HEDGE AGAINST VOLATILITY IN THE EQUITY INVESTMENTS. REAL ASSETS REAL ASSETS, SPECIFICALLY REAL ESTATE AND INFRASTRUCTURE, PROVIDE ADDITIONAL DIVERSIFICATION GIVING US EXPOSURE TO LONG-TERM ASSET GROWTH, A HEDGE AGAINST INFLATION, AND A POTENTIAL HEDGE AGAINST PUBLIC EQUITY VOLATILITY. 29

30 Fixed Income 40.0% STRATEGIC ASSET MIX STRATEGIC ASSET MIX TARGET ASSET ALLOCATION Global Infrastructure Commercial Mortgages Real Estate 5.0% 5.0% 5.0% 20.0% Canadian Equity Global Credit 5.0% Real Assets 10.0% Canadian Core-Plus 20.0% Equity 50.0% 25.0% Global Equity Canadian Core 10.0% 5.0% Global Private Equity Since 2015, we have been working on implementation of the strategic asset mix policy. Our strategic asset mix is a long-term target and contains allocations to private market asset classes that take several years to implement depending on market opportunities. As a result, the Fund s actual asset mix contains overweight positions in global equity, listed infrastructure, and core fixed income. These asset classes will be reduced as our investment managers in private markets find suitable investments and we deploy capital in the target asset classes ANNUAL REPORT

31 Fixed Income 35.8% CURRENT ASSET MIX CURRENT ASSET ALLOCATION AS OF ACTUAL ASSET ALLOCATION AS OF DECEMBER 31, 2017 Global Infrastructure 1.3% Real Estate Listed Infrastructure Global Credit 4.4% 5.5% 3.0% 20.4% Canadian Equity Real Assets 9.8% Canadian Core-Plus 17.3% 14.1% Equity 54.4% 33.2% Global Equity Canadian Core Global Private Equity 0.8% Provident 10 does not actively manage our investments internally, rather we work closely with our investment consultant to select professional investment managers to manage the assets on our behalf. We follow a disciplined process for selecting and monitoring our investment managers that considers a variety of factors including: firm and organizational structure, investment and support staff, investment strategy and philosophy, investment process and portfolio characteristics, historical performance, and fees. As of December 31, 2017, we were working with 18 external investment managers for implementation of 20 discrete mandates. Current asset mix includes net assets directly associated with investing activities. 31

32 2017 PERFORMANCE MARKET COMMENTARY Despite a myriad of world-wide geopolitical tensions, global equity markets enjoyed robust returns in US, European, and Japanese markets all closed out the year with double-digit gains, while Emerging Markets delivered exceptionally strong returns. Stock market volatility was historically low as investors seemingly shrugged off geopolitical risks and focused instead on strong corporate earnings and improved global economic growth. Canadian bond markets experienced volatility in 2017 due to a fluctuating policy view from the Bank of Canada (BoC). However, the Canadian economy delivered surprisingly strong growth, prompting the BoC to raise interest rates twice. While this caused a flattening yield curve, the Canadian bond market finished the year with a modest 2.5% return. The Canadian dollar experienced a relatively strong appreciation of 7% relative to the US dollar, ending the year at approximately 80 cents. While the Canadian equity market lagged the doubledigit returns of the various global equity markets, the S&P TSX Composite Index did realize a return of 9.1% for 2017 and record-breaking highs to close out the year. Performance was up across most sectors, led by healthy economic growth and enthusiastic consumer sentiment. The Energy sector was challenging as the only sector within the index to post negative returns for the year, despite a 16% rise in oil prices. 9.8% GROSS INVESTMENT RETURN IN ANNUAL REPORT

33 GROSS RETURN VS POLICY BENCHMARK (%) TOTAL PSPP GROSS RETURN VS POLICY BENCHMARK AS OF DECEMBER 31, 2017 ADDED VALUE 10 Years % 4 Years % 1 Year % Returns (%) PSPP Performance Policy Benchmark FUND PERFORMANCE Provident 10 has two key performance objectives. The primary objective is to generate a long-term return on invested assets that exceeds the 6% discount rate used by our plan actuary in the most recent actuarial report. Our secondary objective is to outperform the return of the policy benchmark approved by the Board. The secondary objective is evaluated over shorter time periods to allow us to evaluate the effectiveness of our investment strategy at the total fund level. We achieved both of our performance objectives on our invested assets as of December 31, The Fund achieved a one-year return of 9.8% gross of investment management fees (9.5% net of investment management fees), which was higher than the 8.8% policy benchmark and the actuarial discount rate of 6%. The four-year and ten-year annualized returns also exceeded both the policy benchmark and the actuarial discount rate. All asset classes except for Infrastructure contributed positively to the 2017 total fund return. The performance in each asset class is measured in comparison to a relevant benchmark return which allows us to evaluate the asset class and individual manager effectiveness. Our private infrastructure investment program is still relatively new, as such we do not expect positive returns in this early stage of deploying capital. We are working with our investment consultant to progress our program towards full implementation and have committed to several fund investments and co-investments over the past few years. 33

34 FUNDED STATUS WORKING TOWARDS IMPROVING THE PLAN S FUNDED STATUS IS A KEY FOCUS FOR THE BOARD. FAVOURABLE MARKET CONDITIONS SINCE THE GLOBAL FINANCIAL CRISIS HAVE SUPPORTED ASSET GROWTH OVER THE PAST SEVERAL YEARS. AS OF DECEMBER 31, 2017, OUR INVESTED ASSETS WERE $6.728 BILLION AND OUR NET ASSETS AVAILABLE FOR BENEFITS WERE $9.341 BILLION. THE PLAN S LIABILITIES ALSO CONTINUED TO GROW AND WERE $9.737 BILLION AS OF YEAR END, YIELDING A 96% FUNDED RATIO. The Plan s funded ratio has improved steadily over the last few years, however, our Board is mindful that market conditions are dynamic, interest rates have been low for a long time, and member life-expectancy is increasing. The Board is also cognizant of balancing the trade-off between risk in the portfolio with the potential for contribution rate and benefit changes. Our stakeholders need our Fund investments to work hard and so the Plan must take on some risk to achieve our long-term objectives. 96% FUNDED RATIO ANNUAL REPORT

35 IMPROVING FUNDED STATUS % % % % $ BILLIONS % 75% 70% 65% 60% FUNDED RATIO (%) Assets Liabilities Funded Ratio (%) Over the past five years, the Plan s funded ratio has improved considerably. The outcome of the Pension Reform Agreement, including the promissory note from Government, caused the funded ratio to increase from 66.6% in 2014 to 91.2% in The favourable market conditions and strong investment performance over the past few years supported further improvement in funded ratio from 93.5% in 2016 to 95.9% in Our members are our focus, no matter what the markets hold. So we will continue to work closely with our actuary and investment consultant to design and implement strategies that will guide the Plan to long-term sustainability and full funding. The Board will conduct an updated ALM Study in 2018 and the next actuarial valuation is required as at December 31,

36 SECTION FIVE ANNUAL REPORT

37 LOOKING AHEAD THIS IS JUST THE BEGINNING. FOLLOWING A BUSY AND SUCCESSFUL 2017, WE RE EXCITED TO LOOK TO OUR FUTURE AND HOW WE CAN HELP OUR MEMBERS LIVE FULL, RICH LIVES IN RETIREMENT. Recently, our executive leadership team and our Board participated in a strategic planning session to establish our strategic direction for the next three years. Through collaboration and discussion, the following five Strategic Directions were developed: ENRICH THE MEMBER EXPERIENCE ATTRACT, DEVELOP, AND RETAIN TALENT BUILD A SUSTAINABLE PENSION FUND ESTABLISH AND PROMOTE THE PROVIDENT 10 BRAND CREATE A SCALABLE ORGANIZATION Attract, Develop & Retain Talent Build a Sustainable Pension Fund Enrich the Member Experience Establish & Promote the Provident 10 Brand Create a Scalable Organization These Strategic Directions form the foundation of our Strategic Plan. 37

38 GLOSSARY ACTUARY A business professional who applies their knowledge of mathematics, probability, statistics, and risk theory to financial problems involving future uncertainty such as pension plan valuations. ADDED VALUE The difference between the total fund return and the policy benchmark return. The policy benchmark consists of the various market index returns weighted in accordance with the asset mix policy. The added value at the total plan level is an indication of the effectiveness of a plan s external investment managers. ASSET MIX The percentage of an investment portfolio or fund that is invested in each of the main asset types (i.e. short-term investments, fixed income, Canadian equity, international equity, and alternatives). ASSETS The property of the pension fund, primarily comprised of the fair value of its investments. BENCHMARK A standard against which the performance or characteristics of a portfolio or investment is evaluated. For example, the S&P/ TSX Composite Index and the FTSE TMX Universe Bond Index are widely used Canadian equity and Canadian fixed income benchmarks, respectively. CONSUMER PRICE INDEX (CPI) An inflation measure computed by Statistics Canada that calculates the change in prices of a fixed basket of goods and services purchased by a typical Canadian consumer each month. DEFICIT A deficit exists in a pension plan when the actuarial valuation determines that the value of a plan s assets is less than its liabilities. DISCOUNT RATE The rate that reflects what the Plan s assets are expected to return over the long-term and is used by the actuary to determine the value of the Plan s liabilities. DIVERSIFIED PORTFOLIO A portfolio constructed of different asset classes and securities with different levels of risk in an attempt to reduce overall portfolio investment risk. DIVIDEND A distribution of a portion of a company s earnings, decided by the board of directors and paid to its shareholders ANNUAL REPORT

39 FIXED INCOME A type of investment for which periodic income is received at regular intervals and at reasonably predictable levels. These investments are commonly referred to as bonds. FUNDED RATIO The ratio of pension plan assets to pension plan liabilities as determined by the latest actuarial valuation. The funded ratio equals 100% when the value of the pension plan s assets and liabilities are equal. Can be measured on either a solvency or going concern basis. GOING-CONCERN VALUATION A plan s funded status is evaluated on the basis that the plan will continue to operate indefinitely. GROSS OF INVESTMENT MANAGEMENT FEES/GROSS INVESTMENT RETURN Refers to a return on investment before all fees and expenses have been paid to the investment managers. INDEXATION (OF PENSION BENEFITS) The periodic cost of living adjustment of pension benefits, based on a percentage or capped value of the Consumer Price Index. LIABILITIES The amount required by the plan to cover the cost of paying current and future pension benefits. NET ASSETS AVAILABLE FOR BENEFITS The total assets less total liabilities of the Plan that are available for the Accrued Benefit Obligation. This figure is used for calculating the Plan s Funded Ratio. NET OF INVESTMENT MANAGEMENT FEES/NET INVESTMENT RETURN A return on investment after all fees and expenses have been paid to the investment managers. RETURN (ON INVESTMENT) A measure of the gain or loss generated on an investment relative to the amount of money invested (usually expressed as a percentage). SOLVENCY VALUATION A plan s funded status is evaluated assuming the plan will be terminated (or wound up ) on the day of the valuation. It is intended to assess whether the plan has sufficient assets to provide an immediate payout of all benefits that have been earned to that date. SURPLUS A surplus exists in a pension plan when the actuarial valuation determines that the assets available exceed the liabilities to be paid out. UNFUNDED LIABILITY The portion of a liability that is not covered by the value of assets that have been allocated to pay the liability. VOLATILITY A statistical measure of the dispersion of returns for a given security or market index. It generally refers to the amount of uncertainty or risk in the size of fluctuations in the value of an investment. 39

40 FINANCIAL STATEMENTS OF PROVIDENT 10 FOR THE YEAR ENDED 31 DECEMBER ANNUAL REPORT

41 KPMG LLP Toronto Dominion Place 140 Water St, Suite 1001 St. John's NL A1C 6H6 Telephone (709) Fax (709) INDEPENDENT AUDITORS REPORT To the Board of Directors of Provident10 We have audited the accompanying financial statements of Provident10, which comprise the statement of financial position as at December 31, 2017 and the statement of operations for the year then ended, and notes, comprising a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with Canadian accounting standards for not-for-profit organizations, and for such internal control as the Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Provident10 as at December 31, 2017, and its results of operations for the year then ended in accordance with Canadian accounting standards for not-for-profit organizations. Chartered Professional Accountants St. John s, Canada May 9, 2018 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. Printed in Canada. KPMG Canada provides services to KPMG LLP 41

42 PROVIDENT 10 STATEMENT OF FINANCIAL POSITION 31 DECEMBER 2017 WITH COMPARATIVE INFORMATION FOR 31 DECEMBER (000s) (000s) Assets Current assets Cash $ 2,382 $ 1,130 Receivable from Public Service Pension Plan (note 2) - 1,167 Receivable from Government of Newfoundland and Labrador 40 - Prepaid expenses Current portion of promissory note receivable (note 8) 39,852 37,596 42,486 40,106 Capital assets (note 3) 1, Promissory note receivable (note 8) 2,498,931 2,538,783 Total assets 2,543,306 2,579,394 Liabilities and net assets Current liabilities Accounts payable and accrued liabilities $ 1,634 $ 1,683 HST payable Payable to Public Service Pension Plan (note 2) Payable to Province of Newfoundland and Labrador (note 8) Deferred tenant inducement Straight-line rent 99 - Current portion of promissory note payable (note 8) 39,852 37,596 43,997 40,611 Other post-employment benefits liabilities (note 5) ,375 40,611 Promissory note payable (note 8) 2,498,931 2,538,783 Total liabilities 2,543,306 2,579,394 Net assets - - Commitments (note 11). On behalf of the Board: See accompanying notes to financial statements. Director Director ANNUAL REPORT

43 PROVIDENT 10 STATEMENT OF OPERATIONS FOR THE YEAR ENDED 31 DECEMBER 2017 WITH COMPARATIVE FIGURES FOR THE YEAR ENDED 31 DECEMBER (000s) (000s) Revenue Management fees $ 8,390 $ 4,385 Interest 150, , , ,917 Expenses Salaries and benefits 4,899 2,672 Professional services 1, Directors and committees Postage and service charges Interest 150, ,532 Amortization Other operating expenses 1,923 1,017 Total expenses 158, ,917 Excess of revenue over expenses - - See accompanying notes to financial statements. 43

44 PROVIDENT 10 STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 WITH COMPARATIVE FIGURES FOR THE YEAR ENDED 31 DECEMBER (000s) (000s) Cash provided by (used in): Operating activities Net earnings $ - $ - Items not involving cash: Amortization of capital assets Amortization of tenant inducement (50) Change in non-cash operating working capital: Decrease (increase) in receivable from Public Service Pension Plan 2, Increase in receivable from Government of Newfoundland and Labrador (40) - Decrease in prepaid expenses 1 (213) Decrease in accounts payable and accrued liabilities (49) 1,338 Decrease in HST payable (415) 164 Increase in other post-employment benefits liabilities Decrease in payable to Province of Newfoundland and Labrador (1) 282 2,186 1,639 Investing activities: Purchase of capital assets (1,658) (509) Tenant Inducement Increase in straight-line rent 99 - Proceeds on promissory note receivable 37,596 35,467 36,662 34,958 Financing activities: Repayment of promissory note payable (37,596) (35,467) (37,596) (35,467) Increase in cash 1,252 1,130 Cash, beginning of year 1,130 - Cash, end of year $ 2,382 $ 1, ANNUAL REPORT See accompanying notes to financial statements.

45 PROVIDENT 10 NOTES TO FINANCIAL STATEMENTS 31 DECEMBER 2017 Provident 10, (the Corporation ), is a not-for-profit organization incorporated on 31 March 2015 under the authority of Section 36.1 of the Public Service Pensions Act 1991 (the Act ). The Corporation changed its name to Provident 10 from Public Service Pension Plan Corporation, effective 27 August The purpose of the Corporation is to act as Trustee of the Public Service Pension Plan (the Plan ) and to serve as administrator of the Plan. The Corporation is bound, with the Board of Directors, to act in accordance with the Joint Sponsorship Agreement between Her Majesty in Right of Newfoundland and Labrador and The Association of Allied Health Professionals, The Canadian Union of Public Employees, The International Brotherhood of Electrical Workers, The Newfoundland and Labrador Association of Public and Private Employees, Registered Nurses Union Newfoundland and Labrador (collectively The Unions ). A service level agreement (the Service Level Agreement ) was signed between the Corporation and the Province of Newfoundland and Labrador (the Province ) to allow the Province to continue to administer the Plan for an interim period of 12 months. The agreement was renewed by default on 31 March 2016 for one further 12-month period and expired on 31 March The Province continues to provide limited administration services for the disbursement of pension payments and refund of contributions, on an interim basis (Note 9). The Corporation operates under a cost recovery basis, as provided for in the Service Level Agreement. The Corporation is exempt from income taxes, provided certain requirements of the Income Tax Act are met. 1. SIGNIFICANT ACCOUNTING POLICIES A) BASIS OF PRESENTATION The financial statements have been prepared by management in accordance with Canadian accounting standards for not-for-profit organizations in Part III of the Chartered Professional Accountants (CPA) Canada Handbook. B) REVENUE RECOGNITION Fee revenue is recognized as services are provided and collection is probable. C) FINANCIAL INSTRUMENTS Financial instruments are recorded at fair value on initial recognition. All financial instruments are subsequently recorded at cost or amortized cost, unless management has elected to carry the instruments at fair value. The Corporation has not elected to carry any such financial instruments at fair value. Transactions costs incurred on the acquisition of financial instruments measured subsequently at fair value are expensed as incurred. All other financial instruments are adjusted by transaction costs incurred on acquisition and financing costs, which are amortized using the straight-line method. Financial assets are assessed for impairment on an annual basis at the end of the fiscal year if there are indicators of impairment. If there is an indicator of impairment, the Corporation determines if there is a significant adverse change in the expected amount 45

46 PROVIDENT 10 NOTES TO FINANCIAL STATEMENTS 31 DECEMBER SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C) FINANCIAL INSTRUMENTS (CONTINUED) or timing of future cash flows from the financial asset. If there is a significant adverse change in the expected cash flows, the carrying value of the financial asset is reduced to the highest of the present value of the expected cash flows, the amount that could be realized from selling the financial asset or the amount the Corporation expects to realize by exercising its right to any collateral. If events and circumstances reverse in a future period, an impairment loss will be reversed to the extent of the improvement, not exceeding the initial carrying value. D) USE OF ESTIMATES The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the year. Significant items subject to such estimates and assumptions include accounts payable and accrued liabilities and other post-employment benefits. Actual results could differ from these estimates. E) CAPITAL ASSETS Capital Assets are recorded at cost, which includes amounts that are directly related to the acquisition design, construction, development, improvement, or betterment of the assets directly attributable to construction and development. Assets under construction are not amortized until after substantial completion and the assets are put into service. The cost, less residual value, of capital assets is amortized on a straight-line basis over their estimated useful lives as follows: Leasehold improvements Over the term of lease Furniture, fixtures, and equipment 5 years Computer hardware 3 years Computer software 3 years Telephone system 3 years Capital assets are written down when conditions indicate that they no longer contribute to the Corporation s ability to provide goods and services, or when the value of future economic benefits associated with the capital assets are less than their net book value. F) OTHER POST-EMPLOYMENT BENEFITS LIABILITY Under the collective agreement between The Newfoundland and Labrador Association of Public and Private Employees and the Corporation, employees identified on Schedule A of the Joint Sponsorship Agreement are eligible to participate in the Province s other post-employment benefits plan (the OPEB Plan ). The OPEB Plan provides group life insurance and health care benefits on a cost shared basis to retired employees, should they continue to meet the Province s eligibility requirements. The associated employer portion of the costs for the Corporation s employees will be borne by the Corporation ANNUAL REPORT