2.15 Province of Newfoundland and Labrador Pooled Pension Fund

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1 Introduction Te Province of Newfoundland and Labrador sponsors defined benefit pension plans for its full-time employees and tose of its agencies, boards and commissions, and for members of its Legislature. Tese plans include te Public Service Pension Plan (PSPP), te Teacers Pension Plan (TPP), te Uniformed Services Pension Plan (USPP) and te Members of te House of Assembly Pension Plan (MHAPP). On 1 July 1980, te Province of Newfoundland and Labrador Pooled Pension Fund was created under te autority of te Pensions Funding Act for te purpose of providing for te funding of pension plans sponsored by te Province. In accordance wit te Act, te Fund is eld in trust by te Minister of Finance. Te pension plans provide for pensions based on employees lengt of service and igest average earnings. Employees contribute a defined percentage of teir salary, and te employer generally matces tis amount. During te year ended 31 December 2002, tere were approximately 32,000 active members contributing to te Province of Newfoundland and Labrador Pooled Pension Fund (te Fund) and 17,300 pensioners receiving pension benefits from te Fund. Te unfunded pension liability at 31 Marc 2003, Government s fiscal year end, was $3.56 billion. Information on te number of active members, pensioners and te unfunded pension liability are outlined in Figure 1. Figure 1 Active Members, Pensioners, and Unfunded Pension Liability Plan Active Members* Pensioners* Unfunded Liability (Millions) PSPP 25,015 10,733 $1,492.7 TPP 6,379 5,915 1,840.5 USPP MHAPP Total 32,069 17,273 $3,556.8 Sources: 2003 Province of Newfoundland and Labrador Public Accounts * Department of Finance as at 31 December 2002 Auditor General of Newfoundland and Labrador 173

2 Scope and Objectives We completed our review of te Province of Newfoundland and Labrador Pooled Pension Fund in October 2003 to determine canges in te unfunded pension liability and ow te Pension Investment Committee monitors activities of te Fund. Conclusions Te Province of Newfoundland and Labrador Pooled Pension Fund (te Fund) was created on 1 July 1980 under te autority of te Pensions Funding Act for te purpose of providing for te funding of te pension plans sponsored by te Province. Pension Investment Committee and Newvest Realty Corporation Te Pension Investment Committee decided it would create an entity to administer up to $200 million in real estate, comprised of a maximum of $100 million from te Pension Fund, and a maximum of $100 million in mortgages. As a result, Newvest Realty Corporation was formed. Te Committee as contracted wit Penreal Capital Management Limited Partnersip of Ontario to manage te real estate activities. Newvest, to August 2003, as acquired real estate costing $77.59 million. Our review of te Committee s involvement in directing and controlling te real estate activities of Newvest indicated te following: Te Pension Investment Committee does not require an independent external appraisal prior to te acquisition of real estate property. It does; owever, require an appraisal by an external appraiser at least once every two years subsequent to acquisition. At te time we completed our review, te two year limit ad not been reaced, terefore, no suc appraisals were completed. In addition, neiter te Committee nor te Pensions Division of te Department of Finance ave visited any of te real estate properties. During our financial statement audit of Newvest Realty Corporation, we identified several operational issues wic were reported to te Committee. Te Committee was not aware of tese issues prior to our work. Our review also indicated tat Government s Newvest Realty Corporation, a wolly owned subsidiary of te Province of Newfoundland and Labrador Pooled Pension Fund, contravened te Financial Administration Act by borrowing witout legislative autority. Tis resulted from te Corporation financing real estate purcases for four properties troug mortgages totalling $46.62 million. 174 Auditor General of Newfoundland and Labrador

3 Pension Plan Deficiencies Even toug Government as committed substantial annual special payments to address pension funding issues ($163.5 million for ), two of te pension plans will be depleted of assets and require deficiency payments. Te Uniformed Services Pension Plan will be te first affected in and will require annual deficiency payments estimated to be approximately $17 million wile te Teacers Pension Plan will require annual deficiency payments commencing in wic are estimated to be approximately $200 million. Tese deficiency payments are in addition to te $60 million annual special payments for te Public Service Pension Plan estimated by te actuary to be required until at least Canges in te Unfunded Pension Liability During te Year Te unfunded pension liability represents a significant debt for Government and at 31 Marc 2003 totalled $3.56 billion. Tis represents an increase of $164 million or 4.8% from te $3.39 billion balance as at 31 Marc Te unfunded pension liability is comprised of te accumulated difference between pension contributions received and pension benefits paid, togeter wit te impact of te Fund s investment activity and any actuarial canges. Altoug Government as taken some action to address te unfunded pension liability, te liability continues to increase. Our review of te cange in te unfunded pension liability indicated te following: During te year, te Fund reported significant decreases in te actuarial value of its assets ($430 million) and a significant increase in te value of its estimated accrued benefit obligation ($748 million). Tis resulted in an increase of $1.18 billion in te net pension liability. For financial statement purposes and in accordance wit Canadian generally accepted accounting principles, $1.01 billion of te increase is reflected in te cange in te unamortized gains and losses between te two years, te balance of wic is amortized over te expected average remaining service life of plan members. As a result, te unfunded pension liability only increased by $164 million since Wit te exception of te Members of te House of Assembly Pension Plan, pension contributions by active members of te plans, togeter wit matcing employer contributions, are sufficient to meet current service costs. However, tese contributions are not sufficient to meet te pensions costs of individuals wo retired prior to te Fund being establised. Auditor General of Newfoundland and Labrador 175

4 Te number of pensioners is steadily increasing wile te number of active members contributing to te Fund as remained relatively constant. As a result, pension benefits are increasing at a muc iger rate tan pension contributions. For 2002, pension benefits of $296 million exceeded total contributions of $202 million, excluding special payments of $144 million, by $94 million (or 47%). In 1998, Government started to make special payments into te Fund wit a view to reducing te unfunded pension liability. Since tat time Government as made special payments totalling approximately $840 million. However, tese payments are not large enoug to reduce te unfunded pension liability - in fact, te unfunded liability over tat time increased by over $200 million. Interest costs on te unfunded pension liability ave increased from $171 million in 1994 to $270 million in 2003, an increase of $99 million (or 58%). Over te last two years te Fund, similar to many oter large pension funds in Canada, as suffered significant losses on its investments. For te year ended 31 December 2002, te Fund recorded a loss of $73 million on te sale of investments and also recorded a decline of $179 million in te market value of investments eld at year end. Findings and Recommendations Background Prior to 1967, public service salaries and pension benefits were paid under te autority of te Civil Service Act. Under tat legislation tere were no employee or employer contributions to a pension plan and pension benefits were paid out of te Consolidated Revenue Fund. In 1967, legislation was enacted wic required tat employees contribute to a pension plan. Employees pension premiums were paid into te Consolidated Revenue Fund forming part of Government s overall revenues, and pension benefits continued to be paid out of te Consolidated Revenue Fund as a Government expenditure. In 1980, te Province of Newfoundland and Labrador Pooled Pension Fund (te Fund) was establised and bot employee and employer pension premium contributions were required to be paid into te Fund. Subsequent to te establisment of te Fund, pension benefits were paid by te Fund irrespective of weter te employee ad previously contributed pension premiums to it. 176 Auditor General of Newfoundland and Labrador

5 At 31 December 2002, te Province of Newfoundland and Labrador Pooled Pension Fund was comprised of four pension plans: te Public Service Pension Plan, te Teacers Pension Plan, te Uniformed Services Pension Plan, and te Members of te House of Assembly Pension Plan. All employee and employer contributions are deposited into te Fund and pension benefits to plan members and oter pension payments are made from te Fund. Pension Investment Committee and Newvest Realty Corporation Te Pension Investment Committee decided it would create an entity to administer up to $200 million in real estate, comprised of a maximum of $100 million from te Pension Fund, and a maximum of $100 million in mortgages. As a result, Newvest Realty Corporation was formed. Te Committee as contracted wit Penreal Capital Management Limited Partnersip of Ontario to manage te real estate activities. Newvest, to August 2003, as acquired real estate costing $77.59 million. Our review of te Committee s involvement in directing and controlling te real estate activities of Newvest indicated te following: Wile te Corporation s policy is to ave income producing properties appraised by an external appraiser at least once every two years subsequent to acquisition, tere is no requirement to ave properties appraised prior to acquisition. Tis exposes te Corporation to unnecessary risk of losses as te condition and value of te properties are not confirmed by an independent appraisal prior to being purcased. At te time we completed our review, te two year limit ad not been reaced, terefore, no suc appraisals were completed. In addition, neiter te Committee nor te Pensions Division of te Department of Finance ave visited any of te real estate properties. During our financial statement audit of Newvest Realty Corporation, we identified several operational issues wic were reported to te Committee. Te Committee was not aware of tese issues prior to our work. Tese included: issues relating to claims for goods and services taxes; inconsistent accounting treatment for capital improvements and repairs and maintenance expenditures; adequate security deposits not being obtained on all rented units; signed documentation to evidence tat a unit is vacant was not always available; and a property management firm was paying significantly less tan te rate paid by oter tenants. Auditor General of Newfoundland and Labrador 177

6 Contravention of te Financial Administration Act Te Fund olds its real estate investments in Newvest Realty Corporation, a wolly-owned subsidiary incorporated on 9 August 2001 under te Canada Business Corporations Act to invest monies received from te Fund in Canadian real estate property. Te Corporation is also registered under te Corporations Act of te Province of Newfoundland and Labrador. Te Corporation as its ead office in Toronto, Ontario. Te Corporation completed its first full year of operations in December As suc, no trend analysis could be conducted relating to te Corporation s financial results. Our review of te Fund s involvement wit te Corporation did indicate tat bot te Corporation and te Fund, as te only sareolder, contravened te Financial Administration Act by borrowing witout legislative autority. Tis resulted from te Corporation financing real estate purcases troug mortgages totalling $46.62 million for te following four properties: Property located in Wite Rock, Britis Columbia purcased in April 2002, costing $8.95 million, financed troug a mortgage for $4.80 million and troug common sares acquired by te Fund valued at $4.15 million. Property located in Toronto, Ontario purcased in December 2002, costing $11.70 million, financed troug a mortgage for $7.03 million and troug common sares acquired by te Fund valued at $4.67 million. Property located in Brampton, Ontario purcased in January 2003, costing $21.24 million, financed troug a mortgage for $12.99 million and troug common sares acquired by te Fund valued at $8.25 million. Property located in Vancouver, Britis Columbia purcased in August 2003, costing $35.70 million, financed troug a mortgage for $21.80 million and troug common sares acquired by te Fund valued at $13.90 million. 178 Auditor General of Newfoundland and Labrador

7 Te Financial Administration Act states tat no money sall be raised by way of loan by te Province except under te autority of te Legislature. Te Fund was created under te Pensions Funding Act and, as a result, te operations of bot te Fund and te Corporation are governed by te Pensions Funding Act. As neiter te Pensions Funding Act nor any oter legislation autorized te $46.62 million in borrowing, te Corporation and te Fund contravened te Financial Administration Act. Pension Plan Deficiencies In 1998 Government committed to make special payments to te Province of Newfoundland and Labrador Pooled Pension Fund to address funding issues. Te amount tat Government as committed to provide eac year for eac of te four plans is outlined in Figure 2. As te Figure sows, Government as committed to make substantial annual special payments. Information provided by Government s actuary indicates tat, even wit tese planned special payments, te assets currently eld by two of te plans will be fully depleted. Information in Figure 2 sows tat te Uniformed Services Pension Plan will require annual deficiency payments commencing in wic are estimated to be approximately $17 million, wile te Teacers Pension Plan will require annual deficiency payments commencing in wic are estimated to be approximately $200 million. Tere as been no actuarial projection on deficiency payments wic may be required for te Members of te House of Assembly Pension Plan. As tis information sows, based on current actuarial valuations, te pension fund will require a significant cas contribution in order for pensioners to receive teir pensions. Auditor General of Newfoundland and Labrador 179

8 Figure 2 Pension Funding ($ Millions) Special Payments Deficiency Payments Year PSPP TPP USPP MHAPP PSPP TPP USPP MHAPP Total Payments to to to Not Available Source: Report from Government s Actuary Canges in te Unfunded Pension Liability Te unfunded pension liability represents a significant debt for Government wic at 31 Marc 2003 was $3.56 billion. Tis represents an increase of $164 million or 4.8% from te $3.39 billion balance as at 31 Marc 2002, and an increase of $205 million or 6.1% from te $3.35 billion balance as at 31 Marc Te unfunded pension liability is comprised of te accumulated difference between total contributions made by te members of te four pension plans and teir employers, and te pensions benefits paid, togeter wit te impact of investment activity and any actuarial canges in pension obligations and assets eld by te Fund. Information on te unfunded liability as at 31 Marc for te years ended 1994 to 2003 is outlined in Figure Auditor General of Newfoundland and Labrador

9 Figure 3 Consolidated Summary Financial Statements Unfunded Pension Liability As at 31 Marc ($ Billions) Billions Year Source: Province of Newfoundland and Labrador Public Accounts Te cange in te unfunded pension liability is impacted by several factors including: experience losses resulting from actuarial valuations; canges in te number of active plan members and pensioners; te difference between pension benefits paid compared to employee and employer contributions received; increases in interest costs on te unfunded pension liability; losses on Fund investments; and special payments by Government. Information on ow eac of tese factors impact te Province s unfunded pension liability is provided as follows. 1. Experience Losses Resulting From Actuarial Valuations Te Fund s assets represent te financial resources available to pay pension benefits to current and future pensioners. On te liability side, te estimated accrued pension benefit obligation represents te value of retirement benefits attributed to services rendered by current and former employees. At any point in time, te difference between te value of te Fund s assets and te estimated accrued benefit obligation represents eiter a pension surplus or a pension liability. Auditor General of Newfoundland and Labrador 181

10 Figure 4 Unfunded Pension Liability 31 Marc ($ Billions) Bot Fund assets and te accrued pension benefit obligation are based on actuarial valuations obtained by Government. Tese valuations result from a number of assumptions about future events, suc as interest rates, wage and salary increases, inflation rates, and rates of employee turnover, disability and mortality. Te assumptions used reflect te best estimates at a point in time. As te valuations are typically completed every tree years, tere will always be adjustments required to reflect any canges between te assumptions made and te actual conditions wic resulted, as well as te impact on tese assumptions resulting from any plan amendments. Tese adjustments, referred to as experience gains or losses, are included in te Province s calculation of te unfunded pension liability, and for accounting purposes are recognized over te expected average remaining service life of te plan members. Eac year, te cange in te value of Fund assets and te accrued benefit obligation, plus or minus te unamortized portion of any actuarial based canges in te value of tese amounts, results in te overall cange in te unfunded pension liability. Te amounts comprising te unfunded pension liability for eac of te previous five years ending 31 Marc are detailed in Figure 4. Component Estimated Accrued Benefit Obligation Fund Assets Net Pension Liability Unamortized Experience Gains / (Losses) (0.80) Net Unfunded Liability Source: Province of Newfoundland and Labrador Public Accounts 182 Auditor General of Newfoundland and Labrador

11 As Figure 4 sows, at 31 Marc 2003 te Province s estimated accrued benefit obligation was $6.38 billion and Fund assets were $2.02 billion for a net pension liability of $4.36 billion. At 31 Marc 2002 tis net pension liability was $3.18 billion. Tis represents an increase of $1.18 billion. Te $1.18 billion increase in te net pension liability resulted from significant decreases in te actuarial value of Fund assets ($430 million) and a significant increase in te value of its estimated accrued benefit obligation ($748 million). For financial statement purposes and in accordance wit Canadian generally accepted accounting principles, $1.01 billion of te increase is reflected in te cange in te unamortized experience gains and losses between te two years, te balance of wic is amortized over te expected average remaining service life of plan members. As a result, te unfunded pension liability only increased by $164 million since Number of Active Plan Members and Pensioners Figure 5 As at 31 December 2002, tere were approximately 32,000 active members of tese plans and approximately 17,300 pensioners. Figure 5 provides istorical data for te Fund relating to pensioners and active members for te past 12 years. Population History: Pensioners and Active Members Years Ended 31 December (000 s) Tousands Pensioners Acitv e Members Source: Province of Newfoundland and Labrador Pooled Pension Fund Auditor General of Newfoundland and Labrador 183

12 As Figure 5 sows, te number of pensioners is steadily increasing wile te number of active members contributing to te Fund as remained relatively constant. Tis situation as an obvious impact on te Fund s ability to provide pension benefits from te contributions relating to active members. 3. Pension Benefits Paid and Contributions Received During te year ended 31 December 2002, pension benefits paid exceeded pensions contributions by $94 million (or 46.7%). For tat year, te 32,000 employees, including Members of te House of Assembly, and te employer made pension contributions and oter payments into te Fund totalling $346 million under te four pension plans. Tis included a $144 million special payment by Government in excess of matcing provisions, meaning tat total pension contributions by employees, Members of te House of Assembly, and matcing employer contributions totalled only $202 million. During te same period, te Fund provided benefits totalling $296 million to te 17,300 pensioners. Figure 6 Figure 6 provides istorical data for te Fund relating to pension benefits paid and total pension contributions received, excluding special payments, for te past 12 years. Pension Benefit Payments and Contributions Years Ended 31 December ($ Millions) Source: Audited Financial Statements of te Province of Newfoundland and Labrador Pooled Pension Fund 184 Auditor General of Newfoundland and Labrador

13 As Figure 6 sows, pension benefits are increasing at a muc iger rate tan pension contributions. For example, from 1991 to 2002, pension benefits ave increased by $196 million, from $100 million in 1991 to $296 million in 2002 (an increase of 196%), wile total pension contributions, excluding special payments, ave increased by only $54 million, from $148 million in 1991 to $202 million in 2002 (an increase of only 36%). Our review of te most recent actuarial valuations of te Province s four pension plans confirms tis finding. Te valuations indicate tat wit te exception of te Members of te House of Assembly Pension Plan, pension contributions by active members of te plans, togeter wit matcing employer contributions, are sufficient to meet current service costs. However, tese contributions are not sufficient to meet te pensions costs of individuals wo retired prior to te Fund being establised, te interest on te unfunded liability of te plans, and losses on Fund investments. 4. Interest Costs Figure 7 Interest costs alone on te unfunded pension liability during te year ended 31 Marc 2003 amounted to $270 million (i.e. $122 million more tan te special payments made by Government.) Te interest costs relating to te unfunded pension liability eac year since 1994 are outlined in Figure 7. Consolidated Summary Financial Statements Interest Costs on te Unfunded Pension Liability Years Ended 31 Marc ($ Millions) Millions Year Source: Province of Newfoundland and Labrador Public Accounts Auditor General of Newfoundland and Labrador 185

14 Figure 8 As Figure 7 sows, interest costs on te unfunded pension liability ave increased from $171 million in 1994 to $270 million in 2003, an increase of $99 million (or 58%). 5. Losses on Fund Investments Over te last two years te Province of Newfoundland and Labrador Pooled Pension Fund, similar to many large pension funds, as suffered significant losses on its investments. For te year ended 31 December 2002, te Fund experienced a loss of $165 million or 7.7% of average Fund investments. Tis amount is comprised of investment income of $87 million, a loss of $73 million on te sale of investments, and a decline of $179 million in te market value of investments eld at year end. In an April 2003 Benefits Canada report, te average return on investments for 2002 for te top 100 Canadian pension funds was a loss of 6.7%, ranging from a ig of 2.6% return to a low of 9.9% loss. Figure 8 sows te return on investments for te Fund from Province of Newfoundland and Labrador Pooled Pension Fund Return on Investments Years Ended 31 December Year Return ($ Millions) Average Investments ($ Billions) % Return on Investments % % % % 2001 (21) 2.21 (1.0) % 2002 (165) 2.15 (7.7) % Source: Audited Financial Statements of te Province of Newfoundland and Labrador Pooled Pension Fund 186 Auditor General of Newfoundland and Labrador

15 As Figure 8 sows, wile te average return on investments recorded by te Fund for te four years 1997 troug 2000 was $185 million, te combined loss for 2001 and 2002 was $186 million. 6. Special Payments by Government Altoug Government as taken some action to address te unfunded pension liability, te unfunded pension liability continues to increase. In 1998, Government started to make special payments into te Fund wit a view to reducing te unfunded pension liability and since tat time as paid in approximately $840 million. However, tese payments are not large enoug to reduce te unfunded pension liability. In fact, te unfunded liability increased by $200 million during tis period. Recommendations Pension Investment Committee sould: review its approac to monitoring Newvest Realty Corporation; and comply wit te Financial Administration Act. Government sould: continue its efforts to address te unfunded pension liability. Committee s Response Pension Investment Committee and Newvest Realty Corporation General Discussion: Te members of te PIC represent te pension interests of Government, plan participants and pensioners. Since none of te Committee members as te expertise required to construct complex investment portfolios or make strategic investment decisions, te PIC fulfills its fiduciary role by delegating tat responsibility to professional investment counselling firms (Investment Managers). Te structure of te Fund, te delegation of responsibilities, and reporting relationsips ave been designed wit te assistance of Frank Russell Canada Limited (Russells), a pension investment consulting firm, wic is a leader in te field of pension fund governance. Auditor General of Newfoundland and Labrador 187

16 Tis delegation is outlined in te Fund s Statement of Investment Policies and Procedures, and tese investment managers invest funds assigned to tem under terms and conditions outlined in specific mandates. Tese mandates include preestablised bencmarks against wic investment performance is measured by te PIC. Not only is teir performance monitored by senior staff of te Department but also by Russells. In tis way, te PIC exercises its fiduciary responsibilities wile allowing experts in te field to perform te actual investing and portfolio construction. Investment performance and compliance wit establised mandates are reviewed regularly by officials of te Department of Finance and quarterly by te PIC in consultation wit Russells. As well, te PIC meet annually wit eac manager to review all aspects of teir investment program, including compliance wit mandates, senior personnel canges, past investment decisions and future canges to portfolios. Tis general process is followed for all investment managers including Newvest Realty Corporation. Newvest Realty Corporation: Wit respect to te Fund s investment in real estate, te PIC, on te advice of Russells, made te decision to furter diversify te portfolio by investing in real estate. Penreal Capital Management Limited was selected, troug limited tender, to be te real estate portfolio manager. To facilitate investments in real estate and to limit te potential liability against oter assets of te Fund, Newvest Realty Corporation, a limited liability company, was formed. Four members appointed by te PIC sit as directors on te Corporation s board wile officials of Penreal Capital function as te Corporation s operating officers. Your Report indicates tat te PIC as ad very little involvement in directing and controlling real estate activities, and tis is quite true. Te PIC acknowledges it as no expertise in te area of buying or selling complex real estate properties. Consequently, similar to te professionals retained by te PIC in te investment of oter segments of te Fund, Penreal as been engaged to administer te real estate portfolio on bealf of Newvest. Wile te PIC meets wit Penreal on an annual basis to review te year s activities, te Newvest Board of Directors meets, at least, semiannually to review its real estate olding and portfolio strategy. As well, officials of te Pensions division meet on a regular basis if an acquisition is under active consideration. Your Report makes specific reference to two concerns: (i) failure to obtain an independent appraisal prior to acquisition, and (ii) failure to make onsite inspections. 188 Auditor General of Newfoundland and Labrador

17 Wit regard to your Report s first point, Newvest as reviewed tese issues wit Penreal Capital Management wic as stated tat an independent appraisal at te time of purcase will not add any value to te process. Prior to any acquisition, Penreal does an extensive review of any property it wises to consider including professional structural analysis, review of location, existing rent structures and an assessment of real estate market conditions in te area. Tis due diligence process goes far beyond te analysis expected of an independent appraiser and, consequently, suc independent appraisal would be of little value. On te Report s second point, a review of a property by a designate of te PIC would be of limited value as tere are no experts in te real estate field wo sit on te PIC. Te independent confirmation is received wen te individual property is reviewed by an independent appraiser later in te cycle. Te delegation of te Fund s real estate activity to a separate corporation aving a Board of Directors appointed by governing body is an accepted metod of operating real estate investment portfolios in Canada. Since tat Board meets wit Penreal regularly to evaluate acquisitions or sales and, Penreal meets annually wit te PIC to review its mandate and investment decisions, te Department is confident tat te PIC is meeting its fiduciary responsibility. Compliance wit te Financial Administration Act (FAA) In your Report, you indicate tat te Fund is in violation of te FAA as real estate purcases by Newvest Realty Corporation can be levered by way of assuming existing mortgages. Tis borrowing witout specific legislative autority is, in your view, a violation of te FAA. As indicated in previous discussions, te Department of Finance as received a legal opinion from te Department of Justice tat states tat te Fund is not a public fund and, consequently, te FAA does not apply. Te opinion draws a clear distinction between public money regulated by te FAA, wic is received, eld or collected for or on bealf of te Province and tose assets wic are eld in trust for pension plan members. Te Pension Fund is establised under te Pensions Funding Act (PFA) and te operations of te Fund and its subsidiary, Newvest Realty Corporation, are governed by tat Act. Wile tis corporate structure is not unique in te pension industry and is clearly permitted under te Pension Benefits Act, it is not specifically outlined under te PFA. Terefore, for greater certainty, tis Department will approac Government requesting tat te PFA be modified to provide explicit autority to set up subsidiary companies in te administration of its mandate and, also, to clearly state tat te PFA is not subject to te FAA. Tis sould resolve many of your concerns. Auditor General of Newfoundland and Labrador 189

18 Losses on Investments It is true tat te Fund lost $186 million from 2001 and However, it is important to note tat every tree years te PIC undertakes a full review of its investment policy wit te assistance of Russells. Using istorical Capital Market data and Liability and cas flow projections made by te Province s Consulting Actuary, Russells prepares various asset mix scenarios, projects anticipated rates of return and identifies potential market volatility. As a result of tese reviews, te PIC as accepted an aggressive asset mix policy aving 80% of its investment portfolio in equities (including real estate) and 20% in fixed income securities. Wile te portfolio was ard it by te recent down turn in equity markets te performance prior to 2001 provided superior returns. It is important to note tat pension fund investment is a long term strategy to meet pension benefit payments as tey become due and it is te Department s opinion tat wile investment markets will fluctuate from time to time, te aggressive asset mix policy will continue to outperform te 7.5% rate of return assumed by te Province s consulting actuaries in te long term. Unfunded Pension Liability Te Department as been closely monitoring te growt in te unfunded liabilities of te four main defined benefit plans and, in te past, it as made recommendations wic ave included te introduction of special payments, contribution rate increases and benefit reductions. Tese ave been accepted by Government and te Plan membersip. As a result, te financial status of all plans ave continued to improve since te inception of funding in Te Department is certainly not of te opinion tat furter canges are unnecessary and, as a result, it will continue to make recommendations to Government to improve te financial stability of tese pension plans. Treasury Board Secretariat s Response We are concerned wit te increasing unfunded pension liability. As you ave indicated, Government as made substantial annual special payments to address pension funding issues. Wit te exception of te Members of te House of Assembly Plan, contributions by active members, togeter wit matcing employer contributions, are sufficient to meet current service costs. 190 Auditor General of Newfoundland and Labrador

19 Te significant liability as developed over many years and can only be addressed witin te Province s fiscal capacity. Te strategic issue of funding Government s pension programs as to be addressed separately wit eac plan. Improving te unfunded position of te plans would require te full cooperation and participation of all stakeolders. Tere is a commitment to taking appropriate action in tis area, owever, suc action must be witin te fiscal constraints te Province faces. Auditor General of Newfoundland and Labrador 191

20 192 Auditor General of Newfoundland and Labrador