Teachers Retirement Allowances Fund 2012 ANNUAL REPORT SERVING TEACHERS PAST PRESENT FUTURE

Transcription

1 Teachers Retirement Allowances Fund 2012 ANNUAL REPORT SERVING TEACHERS PAST PRESENT FUTURE

2 Mission Statement We commit ourselves to manage the funds entrusted to our care in a prudent and professional manner, and to provide caring and responsive service to members. TABLE OF CONTENTS Overview 1 Message from the Chair 6 Message from the President 8 Plan Governance 10 Member Services 13 Funding Status 19 Province of Manitoba Trust Account 27 Cost of Living Adjustments 28 Investments 31 Summary of Portfolio Holdings Year Data Summary 46 Audited Financial Statements 48 Directory 77

3 Overview 2012 ANNUAL REPORT The Teachers Retirement Allowances Fund (TRAF) administers the defined benefit pension plan for public school teachers in Manitoba. TRAF also manages the assets that support the plan, which as of December 31, 2012, stood at approximately $3.0 billion. In addition, TRAF invests certain trust funds set aside by the Province of Manitoba to support its pension obligations. As of December 31, 2012, these funds totaled approximately $1.8 billion. MEMBERSHIP Active 15, % Retired 13, % Deferred 6, % Total 35, % Active 43.3% Retired 37.0% Deferred 19.7% MEMBERSHIP TRENDS 17,500 15,000 15,403 Active Members 12,500 10,000 13,149 Retired Members 7,500 5,000 6,996 Deferred Members 2, Active Retired Deferred Projected OVERVIEW 1

4 ACCOUNT A ACTIVITY 1 ($ millions) Net Assets Available for Benefits at Beginning of Year $ 2,788 $ 2,787 Add: Member Contributions Province s Contribution to Pension Payments Net Investment Return Deduct: Pension Payments (315) (300) Net Other Payments (eg. Refunds, Reciprocal Transfers) (8) (15) Administrative Expenses (4) (4) Net Assets Available for Benefits at End of Year $ 2,959 $ 2,788 1 Includes the Pension Adjustment Account. NET ASSETS AVAILABLE FOR BENEFITS ($ millions) 3,000 PROVINCE OF MANITOBA TRUST ACCOUNT BALANCE ($ millions) 3,000 2,500 2,500 2,000 2,000 1,500 1,500 1,000 1, Account A Pension Adjustment Account 2 TEACHERS RETIREMENT ALLOWANCES FUND

5 2012 ANNUAL REPORT CONTRIBUTION & PENSION PAYMENT TRENDS 1 ($ millions) Member Contributions Member Contributions Projected Province s Contribution to Pension Payments Province s Contribution to Pension Payments Projected Pension Payments Pension Payments Projected 1 Projected values assume stable active membership and incorporate the member contribution rate increase announced in EXTRAPOLATION OF ACCOUNT A FUNDING STATUS TO JANUARY 1, 2013 ($ millions) Accrued Future Total Assets $ 2, $ $ 3,613.6 Liabilities 2, ,863.2 Surplus/(Deficit) $ (188.6) $ (61.0) $ (249.6) Funded Ratio 93.6% 93.3% 93.5% 1 This amount represents the Net Assets Available for Benefits (basic benefits portion; excludes Pension Adjustment Account) and the present value of certain annual payments to be received from the Province of Manitoba on account of amendments made to The Teachers Pensions Act in 1970 and The future payments from the Province had a present value of $27.1 million as at January 1, This amount is not carried as an asset on the Statement of Financial Position. 2 This amount represents the present value of all contributions expected to be received in the future from members of the plan as at January 1, 2013 and incorporates the member contribution rate increase announced in OVERVIEW 3

6 ACCOUNT A FUNDING STATUS (%) Fully Funded Highest: 105.6% as at January 1, 1990 Lowest: 88.0% as at January 1, Valuation Year (as at January 1) Actual Extrapolated CONTRIBUTION RATES Period Contribution Rate 1 July 1, 1925 December 31, % of salary January 1, 1930 August 31, % of salary September 1, 1939 August 31, % of salary September 1, 1948 August 31, % of salary September 1, 1963 December 31, % of salary January 1, 1966 August 31, % of salary up to YMPE; 6.0% of salary in excess of YMPE 3 September 1, 1977 August 31, % of salary up to YMPE; 7.0% of salary in excess of YMPE 3 September 1, 1980 August 31, % of salary up to YMPE; 7.3% of salary in excess of YMPE 3 September 1, 2005 August 31, % of salary up to YMPE; 8.4% of salary in excess of YMPE 3 September 1, 2012 August 31, % of salary up to YMPE; 8.9% of salary in excess of YMPE 4 September 1, 2013 August 31, % of salary up to YMPE; 9.4% of salary in excess of YMPE 4 September 1, 2014 August 31, % of salary up to YMPE; 9.9% of salary in excess of YMPE 4 September 1, 2015 and following 8.8% of salary up to YMPE; 10.4% of salary in excess of YMPE 4 1 Contributions are not required on salary above the maximum salary for which a benefit can be accrued under the Income Tax Act (Canada). For 2013, this amount is $150,163. Members receiving disability benefits are also not required to contribute. 2 The contribution rate was reduced effective January 1, 1966 concurrent with the commencement of the Canada Pension Plan. 3 The Yearly Maximum Pensionable Earnings (YMPE) is the maximum pensionable earnings under the Canada Pension Plan. For 2013, this amount is $51, The Teachers Pensions Contribution Rates Regulation was enacted in 2011 to increase member contribution rates starting September 1, The total increase is 2% of salary and will be phased in over a four-year period at a rate of 0.5% per year. 4 TEACHERS RETIREMENT ALLOWANCES FUND

7 2012 ANNUAL REPORT ASSET ALLOCATION Target (%) Actual % Fixed Income Equity Real Estate Infrastructure Total Long-term target of 5.0%. Equity 46.4% Infrastructure 2.0% Real Estate 16.4% Fixed Income 35.2% INVESTMENT RETURN (%) % 12.1% 14.8% 15.6% 10.7% 10.7% 9.3% 10-Year Annualized Gross Return was 8.1% 5 5.7% 3.4% 0 5-Year Annualized Gross Return was 4.1% % Administrative Costs $3,390,000 EXPENSE METRICS Administrative Cost per Member 1 $ 119 $ 121 Investment Costs per $100 of Assets $ 0.29 $ Excludes pension interest costs (see page 18 for details). Investment Costs $13,489,000 OVERVIEW 5

8 Message from the Chair Although no immediate action is recommended, the Board has encouraged the Province and MTS to initiate discussions on the maximum member contribution rate that would be acceptable, should a further increase be required. MAL ANDERSON CHAIR PLAN SUSTAINABILITY The Board spent a significant amount of time in 2012 working with management and the plan actuary to complete the January 1, 2012 funding valuation. While we had a fairly clear expectation of our funding status based on internal extrapolations of prior results, the funding valuation produced a funded ratio of 91.7%. While this level is up from the 88.0% level disclosed in the 2009 funding valuation, it highlights the ongoing challenges faced by TRAF (and many other defined benefit pension plans). Despite implementing a program to raise member contribution rates by 2% of salary and outperforming our investment return targets since the last valuation, a combination of increasing life expectancies and low expected investment returns in the future leaves the Province of Manitoba and The Manitoba Teachers Society (MTS) with more difficult choices. Basically, our analysis concluded that TRAF would need to achieve a net investment return of just over 7% for the next 20 years to rectify the current underfunding. While this is possible, it is far from certain. Accordingly, in 2012, the Board set out to develop alternative solutions. The first analysis was focused on our investment program. After considerable discussion and debate, we concluded that our current portfolio properly balances the plan s need for investment return with the level of investment risk that the plan can tolerate. Basically, we are reluctant to increase our risk in an effort to reach for higher returns. While our current portfolio could deliver 7% net over 20 years, this is in excess of our more likely expectation of somewhere in the range of 6 to 6.5%. The level of our member contribution rates, which directly impacts plan sustainability, is the responsibility of the Province and MTS. As mentioned, the plan is currently in the process of phasing in the 2% of salary increase announced in It is being implemented at the rate of 0.5% per annum. The first increase was in 2012, and the last will be in The discussion that follows relates to further increases over and above these. Pursuant to TRAF s Funding Policy, the plan actuary is required to calculate certain data, which is then to be provided to the Province and MTS. This includes the member contribution rate that would be required to achieve 100% funded status. This was determined to be a further 2% of salary. The plan actuary was then asked to make a recommendation regarding TRAF s member contribution rate. His recommendation was that no immediate action was required. Rather, as a 7% per annum net investment return was possible, he was comfortable in leaving everything as is for the next couple of years provided that the situation was closely monitored by the Board. This 6 TEACHERS RETIREMENT ALLOWANCES FUND

9 2012 ANNUAL REPORT recommendation was considered reasonable as any further increases in the member contribution rate would likely not be implemented until after the current increase is fully phased in on September 1, However, although no immediate action is recommended, the Board has encouraged the Province and MTS to initiate discussions on the maximum member contribution rate that would be acceptable, should a further increase be required. It is noted that, in aggregate, members will be contributing approximately 9.4% of salary once the current increase is fully phased in. A further 2% would take us to 11.4%. It is up to the Province and MTS to determine if this is palatable. We have provided for consideration comparative data from other provincial teacher plans. While it is not the Board s decision, we recognize that another option is reducing our liabilities by adjusting pension benefits. Accordingly, in furtherance of our fiduciary duty to keep the Province and MTS informed of the plan s current and future status, and provide related information and analysis, the Board worked with management and the plan actuary to develop a series of scenarios under which benefit levels and eligibility requirements could be adjusted in an effort to reduce the plan s liabilities. We realize that this is a sensitive topic and we are well aware that our role is as administrator only. However, it is critical that the parties who make plan design decisions namely the Province and MTS have the necessary data and analyses, and TRAF is obviously in the best position to provide it. The Board will continue to work closely with all parties the Province, MTS and the plan actuary to make sure that the necessary information to make informed decisions is readily available. For example, a meeting on the issue of our funding status was held with the MTS Provincial Executive in early I can also report an increased level of engagement with the Minister of Education, the Honourable Nancy Allan, who is the minister appointed by the Lieutenant Governor in Council to administer The Teachers Pensions Act. The topics under discussion include Board member appointments, training, education and term limits. We look forward to continuing this dialogue and refining our practices in these areas. Please refer to the Plan Governance section of this report for more specific information on our governance review and other related activities in ACKNOWLEDGMENTS As you know, the Board membership underwent significant change in 2011 and early However, it has now stabilized and I would like to thank our newest members Madeline McKenzie, Heather Grant-Jury and Norm Gould for their efforts in getting up to speed on an expedited basis and contributing in a meaningful way to the Board s work. As a result of various factors, including the plan s funding challenges and the heightened focus on good governance, the Board s responsibilities have expanded, and I thank each of the members, including our external committee members, for meeting these demands and challenges. In closing, I acknowledge the services of management and staff in supporting the work of the Board and its committees, and specifically for ensuring that we have all of the relevant information necessary to fulfill our oversight function. This is only achieved with the high level of passion, dedication and cooperation that they exhibit daily. PLAN GOVERNANCE Effective plan governance remains a high priority. We were pleased that the external governance review conducted in 2012 confirmed that TRAF has a generally robust governance framework and no material deficiencies were identified. Notwithstanding, the Board will continue to assess and, where necessary, bolster TRAF s governance structure and processes. Mal Anderson, Chair MESSAGE FROM THE CHAIR 7

10 Message from the President Sustainability continues to be an area of concern. In addition to options regarding member contribution rates, the annual information package provided by TRAF to the Province and MTS now includes benefit reduction alternatives as a potential solution to future funding challenges. JEFF NORTON PRESIDENT & CEO INVESTMENT PERFORMANCE TRAF s investment portfolio earned 9.3% in 2012, which was very acceptable in absolute terms as it exceeded the level necessary to sustain the plan. However, given our long investment horizon, we like to focus on our 10-year performance number, which sits at approximately 7.8% per annum net of all expenses. As you will learn from reading this report, TRAF needs to earn just over 7% each year in order to avoid further contribution rate increases or benefit reductions. While we will work hard to achieve this result, there is no desire to take excessive risk in reaching for this target. Accordingly, we have not made any major changes to our investment strategy, nor are any anticipated in the immediate future. While risk is hard to define and quantify, a key measure is our exposure to the equity markets. Currently, this exposure remains under 50%. TRAF s portfolio has historically exhibited less risk than its peers, while achieving a similar or greater investment return. We will strive to maintain these portfolio characteristics. In addition to our absolute performance discussed above, we also monitor our relative performance against both designated benchmarks and an appropriate peer group. Over the past 10 years, TRAF has exceeded both its benchmark (by 0.4% per annum) and the median return of our peer group (by 1.0% per annum). While these are useful performance indicators, it is ultimately absolute investment returns that impact the long-term sustainability of the plan. FUNDING STATUS The plan s funding status improved slightly during 2012 and ended the year in the range of 93%. As this is lower than our funding status target, we have spent considerable time and resources working with the Board and the plan actuary to develop a clear path to address the issue. Basically, the recommendation presented to the Province and MTS is that they should spend the next year or two determining how high they are prepared to increase member contribution rates if that becomes necessary. If there is a limit, it should be identified. A limit on such increases would necessitate consideration being given to how benefits might be adjusted to close any remaining funding gap once contribution rates have been raised to the maximum acceptable level. While no immediate action is required, our obligation is to stay out in front of this issue and assist in the development of acceptable solutions that can be implemented on a timely basis if and when required. 8 TEACHERS RETIREMENT ALLOWANCES FUND

11 2012 ANNUAL REPORT These are difficult issues, but the Province and MTS have been very responsible in pursuing the necessary information. We also note that the Province moved quickly to enact the plan actuary s recommendation in 2010 that the member contribution rate be increased by 2% of salary. Although we only play a supporting role in the decision-making process, we look forward to assisting the Province and MTS in developing an acceptable action plan. COLA The Cost of Living Adjustment (COLA) to be granted on July 1, 2013, which is based on 2012 activity, has been determined to be 0.55%. While the plan had funding available to support a COLA of 0.76%, the maximum permissible COLA was limited by the "2/3 of CPI" cap introduced in 2008 as part of the amendments to the COLA provisions of The Teachers Pensions Act. As a result of this cap limiting the amount of COLA to be granted, there is a restricted surplus in the Pension Adjustment Account of approximately $4.8 million. This amount (along with any similar surpluses arising over the next four years) may only be used to support COLAs to be granted on or after July 1, STRATEGIC PLANNING With a long list of possible projects but finite resources, it is important that we properly prioritize our initiatives and then be disciplined to achieve them on time and on budget. This process is guided by a detailed Strategic Plan. In 2012, management worked with the Board to develop a Strategic Plan for years 2013 to A number of initiatives have been identified over this three-year period. Please refer to the Plan Governance section of this report for additional details on upcoming initiatives. MEMBER SERVICES to exceed the active teachers within four to five years. The average age of new retirees also continues to increase since hitting an all-time low of 57.1 years in In 2012, the average age of new retirees was 59.6 years. Although predictions are difficult, this trend is likely to continue and we could see the average retirement age exceed 60 in the near future. The scope of our Online Services continues to grow, as does the number of members who have registered for this service. At the end of 2012, over 8,700 members had registered. If you are not registered for Online Services, we encourage you to do so at your earliest convenience. We are also pleased to report that our administrative costs per member have stayed generally flat over the past 10 years. The 2012 cost was $119 per member, which is also our 10-year average. Our objective is to continue to improve services wherever possible on a cost-effective basis. ACKNOWLEDGMENTS Despite our funding challenges, the people associated with TRAF have continued to serve the membership in the manner intended. This statement encompasses the Board and committee members, senior management, each staff member, the plan actuary and our investment managers and other service providers. While there is always room for improvement, we have collectively delivered strong results in all key areas including member service and long-term investment performance. I am proud to be a part of this dedicated group. Jeff Norton, President & CEO TRAF s membership increased to over 35,000 in The number of retired teachers continues to see the greatest increase, and we expect the number of retired teachers MESSAGE FROM THE PRESIDENT 9

12 Plan Governance HIGHLIGHTS Three new Board members were appointed A Strategic Plan covering the years 2013 to 2015 was approved An independent review of TRAF s governance structure, processes and policies was facilitated Senior management succession plans were reviewed and updated We are committed to sound governance and reporting to our members in an open and transparent manner. We continue to focus on strengthening our plan governance structure through critical analysis and action where required. While our website sets out our general governance structure and basic information, recent and noteworthy initiatives are summarized here in our Annual Report. NEW BOARD MEMBERS Madeline McKenzie and Heather Grant-Jury were appointed to the Board effective January 1, John Ehinger, who had been appointed to the Board on August 2, 2011, moved outside of the Province and as a result resigned from the Board effective March 7, Norm Gould was appointed as Mr. Ehinger s successor effective March 8, Please refer to the website for information on each of the current Board members. STRATEGIC PLAN Under its Terms of Reference, the Board is responsible for the overall strategic direction of the organization and addressing all matters of policy. This includes developing TRAF s strategic initiatives and documenting them in a Strategic Plan. In 2012, the Board worked with management to develop a Strategic Plan for the next three years (2013 to 2015). Some of the key initiatives to be addressed over this period include: Reviewing and publishing our member service standards Reviewing and updating our overall communications strategy Developing a structured program of internally produced and delivered Board education to complement external activities Developing a policy regarding the delegation of certain investment-related authority to the Chief Investment Officer GOVERNANCE REVIEW As part of its commitment to strong governance, the Board engaged an independent third party consultant to review TRAF s governance structure, processes and policies. This project was undertaken by Cortex Applied Research (Cortex). Cortex is a specialized management consulting firm that is focused on assisting public and corporate retirement boards regarding governance matters. Through this process, the Board BOARD MEMBERS MAL ANDERSON Chair HENRY SHYKA Vice Chair RAY DESROCHERS RICHARD ALARIE MADELINE MCKENZIE HEATHER GRANT-JURY NORM GOULD 10 TEACHERS RETIREMENT ALLOWANCES FUND

13 2012 ANNUAL REPORT was able to assess its governance practices relative to both industry peer practices and published best practice standards. The scope of the project was wide and areas of review included: Board and committee structures and practices Clarity and documentation of roles and responsibilities Board and management authorities Risk management policy framework and practices Code of conduct, including conflict of interest identification and management Disclosure policies and practices The exercise concluded with the presentation by Cortex of a detailed report to the Board at the 2012 Governance Retreat. The report concluded that TRAF has a generally robust governance framework and no material deficiencies were noted. However, Cortex did make certain recommendations for improvement and TRAF is in the process of considering each recommendation and making certain policy and operational changes as appropriate. COMMUNICATION OF PLAN STATUS While the Board is not responsible for policy decisions regarding plan design, it does play an important role in communicating timely and accurate information to support the decision-making process. To this end, the Board has developed a formal process to ensure that this occurs on a structured basis each year. On December 10, 2012, the Chair and Vice Chair, together with three members of management and the plan actuary, met with The Manitoba Teachers Society (MTS) and the Province, including the Minister of Education and the Deputy Minister of Education, to discuss the current funding status and long-term sustainability of the plan. The focus of this Annual Briefing Session was the actuarial valuations conducted in See the Funding Status section of this Annual Report for a complete summary of the valuations. The message conveyed was as follows: The plan is approximately 93.5% funded as at the end of 2012 Assuming that the various assumptions are realized, TRAF will only increase its funding status to 100% if our net investment return exceeds 7% per annum over the projection period (which runs until 2031) If that does not happen, then the Province and MTS need to consider further member contribution rate increases (beyond the recent 2% of salary increase) While no immediate action is required, the Province and MTS were encouraged to discuss the issues and, if possible, agree in advance on the maximum acceptable level for member contribution rates (the blended rate for the entire membership will be approximately 9.4% of salary once the current rate increase is fully implemented on September 1, 2015) If the Province and MTS are not prepared to further increase the member contribution rate by the full amount determined necessary, then the Province and MTS should consider how benefit levels could be adjusted in the future to reduce the plan s liabilities and achieve an adequate level of funding The Province and MTS were provided with a comprehensive set of supporting documentation and analyses. TRAF also reinforced its commitment to provide whatever additional assistance may be required for the Province and MTS to address this issue. EXTERNAL COMMITTEE MEMBERS GARY GIBSON Investment Committee DAVID STANGELAND Investment Committee SAM PELLETTIERI Investment Committee KEITH FINDLAY Audit Committee PLAN GOVERNANCE 11

14 In addition to our communications with the Province and MTS, we are also responsible to ensure that our members have the information necessary to fully understand the plan and how it operates. This is achieved through a comprehensive communications program including this Annual Report, newsletters and many other publications and audiovisuals available through our website. In addition, we welcome any member or group of members to contact us for assistance in understanding the plan workings and status. RISK MANAGEMENT One of the Board s responsibilities is to ensure that each of the plan s material risks are identified and addressed. While this is an ongoing process, we typically review one or more components of our overall risk management program each year. In 2012, our key initiative was the long-term sustainability of the plan. As mentioned above, in addition to our historical analysis of required member contribution rates and required investment return, the Board expanded the analysis and discussion into the area of benefit adjustments. However, the Board s focus and role is simply to provide data and analyses the Board, as plan administrator, has no preference or position on what the Province and MTS ultimately decide. Another initiative in 2012 related to reviewing and updating our senior management succession plans. This was completed at the 2012 Governance Retreat and covers both planned and unplanned departures of each member of senior management. OTHER REPORTS Member Appeals During 2012, there was one appeal filed under our Member Appeal Policy. The appeal was addressed in accordance with the provisions of the policy. Information Requests TRAF is subject to provincial access to information legislation. During 2012, TRAF received one request for information which was addressed in accordance with our Access to Information Policy. Whistleblower Protection TRAF is subject to The Public Interest Disclosure (Whistleblower Protection) Act. Among other obligations, TRAF is required to report any disclosures made under this legislation. No disclosures were made in MEETING ATTENDANCE The table below shows the number of meetings attended by each Board and committee member relative to the total number of meetings that could have been attended. Aggregate Board and committee attendance was 94.8%, up from 93.9% in Investment Audit Board Members Appointed Board Committee Committee Mal Anderson, Chair January 3, of 11 5 of 5 n/a Henry Shyka, Vice Chair 1 October 17, of 11 5 of 5 n/a Ray Desrochers December 15, of 11 n/a 3 of 3 Richard Alarie 1 August 2, of 11 5 of 5 n/a John Ehinger 1, 2 August 2, of 2 n/a n/a Heather Grant-Jury January 1, of 11 n/a 2 of 3 Madeline McKenzie January 1, of 11 n/a n/a Norm Gould 1 March 8, of 9 n/a n/a 1 MTS nominee. 2 Term ended March 7, Committee Members Gary Gibson September 27, 2007 n/a 3 of 5 n/a David Stangeland January 1, 2009 n/a 5 of 5 n/a Sam Pellettieri January 1, 2009 n/a 4 of 5 n/a Keith Findlay December 14, 2009 n/a n/a 3 of 3 12 TEACHERS RETIREMENT ALLOWANCES FUND

15 Member Services 2012 ANNUAL REPORT HIGHLIGHTS 497 pensions were initiated in 2012, down from 542 in 2011 The average age of new retirees (excluding deferred members) was 59.6, continuing the upward trend of recent years Member contribution rate increase of 0.5% was implemented in September 2012 Administrative costs per member were $119 in 2012 MEMBERSHIP Active 15, % Retired 13, % Deferred 6, % Total 35, % MEMBERSHIP TRENDS 20,000 15,000 Active Members There were 888 members who joined TRAF during 2012, bringing the total number of active members to 15,403. Active members include any members who have pensionable service in 2012 (and does not equate to the number of teaching positions in Manitoba). As at December 31, 2012, 70% were female and 30% were male. The average age was 43 years, similar to There are 2,478 members age 55 or older who will be eligible to retire during Of these, 2,091 have at least 10 qualifying years and are eligible for an unreduced pension; the remaining 387 are eligible for an actuarially reduced pension. A further 2,289 members will become eligible during the next five years. 12,500 10,000 7,500 AGE & GENDER DISTRIBUTION ACTIVE MEMBERS 2,000 5,000 1,500 2, Active Retired Deferred 1, to Female Male MEMBER SERVICES 13

16 New Retired Members TRAF processed 497 retirements (active and deferred) during 2012, a decrease of 8% compared to As is typical, a large number of retirements (56%) occurred at the end of June. The most common plan option selected by retiring members was Plan C Full to Last Survivor (38%). In addition, 11% of retiring members opted to integrate their TRAF pension with one or both of Canada Pension Plan and Old Age Security benefits. The average age of new retirees (excluding deferred members) was 59.6 years, up from 59.3 in The average monthly pension granted to such retirees was $2,643, down $14 from $2,657 in New retirees are expected to receive their pension for an average of 29 years (longer than their average length of service of 26.8 years), with their beneficiaries continuing to receive the benefit for an average of five additional years. NEW RETIREMENT TRENDS Active Deferred NEW RETIREMENTS Combined Female Male Combined Female Male Active Deferred Total NEW RETIREE PROFILE Active Members Only Combined Female Male Combined Female Male Average Age (years) Average Service (years) Average Monthly Pension $2,643 $2,465 $3,088 $2,657 $2,530 $2,889 Average Projected Years on Pension (excluding beneficiaries) TEACHERS RETIREMENT ALLOWANCES FUND

17 2012 ANNUAL REPORT Retired Members There were 13,149 retired members as of December 31, 2012, an increase of 2.6% over Females made up 60% of retired members. The average age of all retired members was 70.0 years, up slightly from The average monthly pension was $2,093, up 1.4% from $2,063 in There were 991 retired members (including beneficiaries of deceased members) age 85 or older, and 21 were age 100 or older. Our oldest member is age 106 and has been receiving a pension since Just over 11% of pension recipients (1,458) live outside of Manitoba and 172 of them live outside of Canada. All but 44 pension recipients receive their monthly payments by automatic bank deposit. AGE & GENDER DISTRIBUTION RETIRED MEMBERS 2,000 1,500 1, Female Male PENSIONS IN PAY Retired Members Female 6,915 6,659 Male 5,026 4,961 Beneficiaries of Deceased Retired Members Female Male Recipients of Other Benefits Including Annuities Total 13,149 12,813 RETIREE PROFILE Combined Female Male Combined Female Male Average Monthly Pension $2,093 $1,897 $2,379 $2,063 $1,861 $2,350 MEMBER SERVICES 15

18 Deferred Members At December 31, 2012, there were 6,996 deferred members (ie. former teachers who have contributions remaining in TRAF) who are or will become entitled to a benefit. TRAF processed benefits including pensions, refunds and service transfers for 201 deferred members during Benefits Statements and other pension correspondence continued to be provided on an electronic basis to vested members who are registered for Online Services. In 2012, notice was provided to vested members with three to nine years of qualifying service indicating they were now eligible for: A reduced pension payable as early as age 55, equal to the actuarial equivalent of the pension that would have been payable at age 65, rather than waiting until age 65 as required under previous rules An immediate lump sum payment in cases where the monthly pension or commuted value is below the minimum pension threshold Over 1,500 members in deferred status are affected by this change. Please refer to your Benefits Statement, available through Online Services, to determine how this impacts you. In addition, we are continuing to establish contact with members who have not maintained a current address with TRAF, so that the necessary information can be provided and benefits can be paid on time. Currently, there are 2,549 members in deferred status for whom we do not have an address. INFORMATION DELIVERY During 2012, 18,364 pension estimates were calculated; 14,739 (80%) were calculated through Online Services. There were 28 seminars conducted throughout Manitoba in A total of 1,054 members registered for these seminars and 804 individuals accessed the seminar audiovisual through the TRAF website. During 2012, TRAF participated in three seminars focusing on information specific to the early to mid-career teacher. There were 1,049 member appointments in 2012 (compared to 1,116 in 2011). Of these, 8.5% (89) were held in conjunction with retirement seminars and 13.5% (142) took place on Saturdays. As a result of changes in the formula to purchase parental/ adoption leave that were enacted in 2011, TRAF processed 218 refunds to members who had made a past payment under the previous actuarial formula. In addition, 175 members applied to purchase their past parental leaves under the reduced formula. INFORMATION REQUESTS Pension Estimates Letter 3,625 3,422 Online 14,739 9,283 Total 18,364 12,705 Number Registrants Number Registrants Seminars Winnipeg Rural Total 28 1, Appointments Regular Saturday At Seminars Total 1,049 1, TEACHERS RETIREMENT ALLOWANCES FUND

19 2012 ANNUAL REPORT CONTRIBUTION RATE INCREASE The initial increase of 0.5% in the member contribution rate was implemented in September Additional increases of 0.5% of salary are scheduled to occur on September 1 in each of 2013, 2014 and WEBSITE & ONLINE SERVICES The website had an average of 188 visits per day and the most frequently accessed features were application forms, Annual Reports and plan information documents. Registration for secure Online Services increased to 8,709 members as at December 31, 2012, up 40% from TRAF continued to promote Online Services registration and awarded various prizes to registered members selected through a random draw. ONLINE SERVICES USAGE Effective September 1 of each year Salary up to YMPE 1 7.3% 7.8% 8.3% 8.8% Salary above YMPE 8.9% 9.4% 9.9% 10.4% 1 The Yearly Maximum Pensionable Earnings (YMPE) is the maximum pensionable earnings under the Canada Pension Plan. For 2013, this amount is $51,100. Feature Correspondence 7,054 4,050 Pension Estimator 14,739 9,283 My Teaching Account 6,694 3,950 My Pension Account Tax Calculator 5,980 4,540 TRAF recognizes that electronic communications are more cost-effective and friendlier to the environment. As a result, we are producing more documents in this medium. Survey results indicate members strongly support this initiative. FRENCH-LANGUAGE SERVICES TRAF continues to offer French-language services and has a variety of publications that are available on the website including the Annual Report Summary, newsletters and plan information documents. In addition, the annual Benefits Statement for active members and pension change notifications for retired members are available online to registered members who selected French as their language preference through Online Services. MEMBER SURVEYS TRAF continues to score high on surveys with respect to member appointments and retirement seminars. Feedback is also obtained from new retirees on the level of service they received and the effectiveness of our communications. The response was positive in all service areas, particularly during member appointments with 98% of members surveyed indicating they strongly agree the Member Service Specialist was knowledgeable and 99% indicating their questions were answered. As always, comments and feedback are appreciated and help to enhance our service levels so that members needs can continue to be met efficiently and cost-effectively. SCHOOL DIVISION REPORTING In order to provide accurate and timely benefit information to members, TRAF relies on the school divisions to report salary, service and contribution data for each member. TRAF works closely with school divisions to continually improve the data reporting process. During the school year, 26 of the 38 school divisions settled outstanding collective agreements which resulted in over 38,000 records requiring adjustment and 325 pensions requiring recalculation. MEMBER SERVICES 17

20 ADMINISTRATIVE EXPENSES Our objective is to deliver a high level of service on a costeffective basis. To assist stakeholders in assessing our cost effectiveness, we provide this summary of administrative expenses. All expenses incurred are allocated between those related to administrative activities and those related to investment activities. The table below sets out our administrative related expenses for 2012, with data from 2011 included for comparison. An analysis of our investment related expenses can be found in the Investments section of this report. As in prior years, we have excluded pension interest costs of $294,000 (2011 $269,000) as they are generally offset by investment earnings on funds TRAF has set aside to support the pension amounts to be paid to TRAF employees in the future. Year-over-year, our administrative costs decreased by $9,000 (0.3%). As TRAF had a total of 28,552 active and retired members in 2012, the Administrative Cost per Member was $119, which represents a $2 (1.7%) decrease from the 2011 amount of $121 per member. Please refer to the 10-Year Data Summary in this report for information on our Administrative Cost per Member since Based on an analysis of available information regarding other Manitoba-based public sector plans and other teacher plans in Canada, TRAF believes that its administrative costs are reasonable. The budget approved by the Board for 2013 forecasts a Cost per Member of $122, based on projected administrative expenses of $3,525,000. ADMINISTRATIVE EXPENSE SUMMARY Change ($ thousands) $ % Salaries and Benefits $ 2,304 $ 2,472 (168) (6.8) Office and Administration Actuarial Fees Custody and Banking Communications (20) (17.9) Travel Professional Fees Board and Committees Recoveries (154) (129) (25) (19.4) Total $ 3,390 $ 3,399 $ (9) (0.3)% 18 TEACHERS RETIREMENT ALLOWANCES FUND

21 Funding Status 2012 ANNUAL REPORT HIGHLIGHTS Triennial funding valuation as at January 1, 2012 was completed, showing a deficit of $307.1 million and funded status of 91.7% Member contribution rate increase of 2% of salary improved funding by $136.6 million Better than expected investment returns during the 2009 to 2011 period improved funding by approximately $24 million Increased life expectancy reduced funding by almost $40 million Investment returns of 9.0% (net) in 2012 improved funding status to approximately 93.5% at end of 2012 The financial health of a pension plan is measured by its funding status. Funding status is determined through an actuarial funding valuation, which compares the value of the assets to the expected costs of future benefits as of the valuation date. This section of the Annual Report outlines the structure of the various accounts within TRAF and the funding status of such accounts. ACCOUNT STRUCTURE Benefits paid under the plan are funded through certain accounts referenced under The Teachers Pensions Act (TPA) as Account A, Account B and the Pension Adjustment Account (PAA). Each of these accounts is subject to actuarial valuations. Those in respect of Account A and Account B are discussed in this section. The PAA valuation is discussed in the Cost of Living Adjustments section. TRAF also maintains several other accounts. Specifically, there are two employer trust accounts, one for The Manitoba Teachers Society (MTS) and one for the Manitoba School Boards Association (MSBA). As certain employees of MTS and MSBA are eligible to participate in the plan, the TPA requires that these organizations bear the cost of the employer portion of any pension (or part thereof) that relates to service with such organizations. To the extent that MTS and MSBA set aside funds to support such pension liabilities, such trust funds are held and managed by TRAF. While the Province of Manitoba Trust Account (PMTA) does not form part of the pension plan, it is of importance to members. Please refer to the Province of Manitoba Trust Account section of this report for additional details. PRIMARY ACCOUNTS Account A Pension Adjustment Account (PAA) 83.3% of member contributions are allocated to this account; this will decrease to 83.2% effective September 1, 2015 Responsible for 50% of the basic pension benefits paid by TRAF Balance at the end of 2012 was approximately $2.7 billion 16.7% of member contributions are allocated to this account; this will increase to 16.8% effective September 1, 2015 Responsible for 50% of the COLA amounts paid by TRAF Balance at the end of 2012 was approximately $218 million Account B No member contributions are allocated to this account Responsible for 50% of both the basic pensions and COLA amounts paid by TRAF The Province of Manitoba has a statutory obligation to deposit the required funds on a monthly basis FUNDING STATUS 19

22 ACTUARIAL VALUATIONS As mentioned, an actuarial valuation is necessary to assess the long-term sustainability of the plan. It serves as a decision-making tool for plan sponsors. A defined benefit pension plan has financial commitments that will be fulfilled many years in the future. For example, based on our current data, new retirees are expected to collect their pensions for over 29 years. As they will not make contributions during this period, the plan sponsors need to ensure that TRAF will have sufficient assets to make those payments. A valuation is an actuarial calculation of two main items the present value of all plan assets and the present value of all plan liabilities. It is calculated as of a specific date. If the plan assets exceed liabilities, the plan has a surplus. If the liabilities are higher, the plan has an unfunded liability (also referred to as a deficit ). By law, a funding valuation must be prepared at least every third year. Funding valuations are conducted by an independent actuarial firm. The current plan actuary is Aon Hewitt. A valuation was performed as at January 1, It included separate reports for each of Account A, Account B, the MTS Trust Account and the MSBA Trust Account. The next valuation is scheduled to be completed in 2015 and will assess the status of each of these accounts as at January 1, In conducting a valuation, many future events must be assumed, or predicted. These assumptions include: How long members will work What level of salary increases they will receive When they will retire How long they will live How much TRAF will earn on its investments While it is expected that the actual experience will be close to that assumed, material differences can occur. Accordingly, a valuation should be considered as a guide, not a definitive statement. As mentioned above, a valuation must be updated at least every three years. This permits a plan to adjust its assumptions as required to better reflect the actual experience. ACTUARY S OPINION I was retained to perform an actuarial valuation of the Teachers Retirement Allowances Fund (the Fund ) as at January 1, 2012, and an actuarial valuation on the Pension Adjustment Account (PAA) of the Fund as at December 31, The PAA valuation included a recommendation for additional indexing to be effective July 1, I have also provided a methodology to the Fund to calculate the extrapolated obligations for pension benefits at December 31 in subsequent years until the next valuation is performed. The valuations were carried out in accordance with accepted actuarial practice and the valuations and extrapolation have been performed in accordance with the relevant standards of the Canadian Institute of Actuaries and regulatory requirements. The objective of the financial statements is to fairly present the financial position of the Fund as at December 31, The financial statement disclosure of the Fund s obligations for pension benefits have been based on the valuations and the extrapolation method provided. The actuarial assumptions used in the extrapolation methodology represent management s best estimate of future events. The assumptions are in accordance with accepted actuarial practice and are consistent with the most recent valuations. However, future experience differing from the assumptions used will result in gains or losses that will be revealed in future valuations. In my opinion, the membership data on which the valuations were based are sufficient and reliable for the purposes of the valuations; the assumptions are, in aggregate, appropriate for the purposes of the valuations; and the methods employed in the valuations are appropriate for the purposes of the valuations. My opinions have been given, and the valuations have been performed in accordance with accepted actuarial practice. Timothy L. S. McGorman Fellow of the Canadian Institute of Actuaries Fellow of the Society of Actuaries February 20, TEACHERS RETIREMENT ALLOWANCES FUND

23 2012 ANNUAL REPORT 2012 VALUATION ASSUMPTIONS The January 1, 2012 valuation includes numerous assumptions regarding both economic and non-economic items. The table below outlines the primary economic assumptions used in the valuation. PRIMARY ECONOMIC ASSUMPTIONS Item Assumption 1 Net Rate of Return on Plan Assets 6.25% Inflation 2.00% Cost of Living Adjustments 1.00% General Salary Increases 3.00% Salary Increases for Seniority and Education 0.50% to 5.50% YMPE Increases % 1 All rates are per annum. 2 The Yearly Maximum Pensionable Earnings (YMPE) is the maximum pensionable earnings under the Canada Pension Plan. The primary non-economic assumptions relate to the incidence of mortality, retirement and termination (ie. withdrawal from teaching for reasons other than death or retirement). Each of these assumptions is based on estimates considered reasonable by the actuary following a study of historical experience conducted in 2008 (and covering the plan s experience from 2003 to 2007 inclusive). CONTRIBUTION RATE INCREASE The 2012 valuation results that follow include the impact of the member contribution rate increase of 2% of salary that was announced in This increase is being phased in at the rate of 0.5% per annum. The first adjustment was made on September 1, 2012 and the next three adjustments will be made on September 1 of each of the next three years (with the last increase being made on September 1, 2015). SMOOTHING In assessing TRAF s valuation results, it should be noted that TRAF does not smooth investment returns. Smoothing is a permitted, but not mandatory, actuarial practice of recognizing investment gains and losses over multiple years rather than fully recognizing them in the period of occurrence. We believe that by not smoothing, we provide a more meaningful presentation of our financial position as at the valuation date. It is also, in our view, more transparent as market gains and losses are reflected as they occur VALUATION RESULTS ACCOUNT A The Account A assets include the funds currently invested, together with the contributions expected to be received in the future from the members of the plan as at the valuation date. The Account A liabilities represent approximately 50% of the pension payments that are expected to be made to current active and retired members. As of January 1, 2012, Account A was determined to have liabilities that exceeded its assets, resulting in an unfunded liability of $307.1 million (which is an improvement over the $391.4 million unfunded liability in 2009). This equates to a funded ratio of 91.7%. Of the unfunded liability, $230.6 million relates to accrued service (service prior to January 1, 2012), and the rest relates to future service. The fact that the present value of future contributions from current members (ie. assets) is $76.5 million (or 8.7%) less than the present value of the corresponding liabilities related to benefits for future service indicates that, based on the assumptions used in the valuation, current members will not, even after the recent contribution rate increase is fully implemented in 2015, be contributing at a rate sufficient to fund their expected future benefits. As noted under the SUMMARY OF ACCOUNT A FUNDING VALUATION AS AT JANUARY 1, 2012 ($ millions) Accrued Future Total Assets $ 2, $ $ 3,412.6 Liabilities 2, ,719.7 Surplus/(Deficit) $ (230.6) $ (76.5) $ (307.1) Funded Ratio 91.9% 91.3% 91.7% 1 This amount represents the Net Assets Available for Benefits (basic benefits portion; excludes Pension Adjustment Account) and the present value of certain annual payments to be received from the Province of Manitoba on account of amendments made to The Teachers Pensions Act in 1970 and The future payments from the Province had a present value of $27.1 million as at January 1, This amount is not carried as an asset on the Statement of Financial Position. 2 This amount represents the present value of all contributions expected to be received in the future from members of the plan as at January 1, 2012 and incorporates the member contribution rate increase announced in FUNDING STATUS 21

24 Projection Valuation section on page 24, this shortfall will need to be covered by excess investment returns or further contribution rate increases. RECONCILIATION TO PRIOR VALUATION The table below reconciles the items that contributed to the deficit reducing from $391.4 million in 2009 to $307.1 million as at January 1, As you will note, the primary contributor to the improved funded status was the member contribution rate increase. The impact in dollar terms was just over $136.6 million. Regarding investment experience, our return assumption in the 2009 valuation was 6.25% per annum (net). Our actual net return during the three-year period from 2009 to 2011 was approximately 7.45%, or 1.2% above our assumption. This excess return improved our funding status by approximately $24 million. The primary factors with a negative impact on funding status were non-investment experience losses and further adjustments to future mortality expectations. The non-investment experience losses reflect the impact our actual experience regarding certain demographic and other non-invested related items over the 2009 to 2011 period versus what we had assumed in the last valuation. In aggregate, these items resulted in a decrease in our funding status of approximately $36 million. The impact of our expectation that our retired members will live longer (and collect further pension payments) resulted in a further reduction of $39.7 million. RECONCILIATION OF ACCOUNT A DEFICIT Surplus/(Deficit) as at January 1, 2009 $ (391,406,000) Gains/(Losses) due to Experience Investment Related $ 24,379,000 Non-Investment Related $ (35,696,000) Gains/(Losses) due to Changes in Assumptions Mortality $ (39,703,000) Other $ (1,318,000) Gains/(Losses) due to Changes in Plan Provisions Increase in Member Contribution Rate $ 136,638,000 Surplus/(Deficit) as at January 1, 2012 $ (307,106,000) SENSITIVITY OF ACCOUNT A VALUATION As mentioned, an actuarial valuation is highly dependent on the underlying assumptions. One of the key assumptions is the expected investment return on plan assets. As noted, our assumption for the net rate of return on plan assets is 6.25% per annum. This rate is based on the long-term expected return of our specific asset mix, plus a small margin for adverse deviation. The following table illustrates what the results of the Account A valuation as at January 1, 2012 would have been if this assumption had been adjusted up or down by 0.25%. Net Rate of Funded Return Assumption Surplus/(Deficit) Ratio 6.50% ($190.5 million) 94.7% 6.25% ($307.1 million) 91.7% 6.00% ($442.5 million) 88.6% 22 TEACHERS RETIREMENT ALLOWANCES FUND

25 2012 ANNUAL REPORT EXTRAPOLATION OF ACCOUNT A VALUATION RESULTS While extrapolating the results of an actuarial valuation has some inherent limitations, it is nonetheless a meaningful way to monitor a plan s funding status. An extrapolation can incorporate actual investment results, contributions received and benefits paid since the last formal valuation. The limitations are that the plan s actual experience with respect to mortality, retirement and termination since the date of the last valuation will not be accounted for until the next formal valuation (ie. the extrapolation will continue to rely on assumptions for these variables). These amounts can only be determined once the actuary has analyzed the plan member data in connection with the formal actuarial valuation. In addition, an extrapolation does not account for any changes in the assumptions from those used in the last funding valuation. The table below provides an extrapolation of the Account A funding status to January 1, Based on this extrapolation, the funded ratio in respect of accrued service has increased from 91.9% on January 1, 2012 to 93.6% on January 1, This increase of approximately $42 million is largely due to investment earnings exceeding the assumed rate of 6.25% per annum. The funded ratio in respect of future benefits has increased to 93.3%, which is largely due to the implementation of the increase in contribution rates. The total funded ratio has increased from 91.7% to 93.5%. EXTRAPOLATION OF ACCOUNT A FUNDING STATUS TO JANUARY 1, 2013 ($ millions) Accrued Future Total Assets $ 2, $ $ 3,613.6 Liabilities 2, ,863.2 Surplus/(Deficit) $ (188.6) $ (61.0) $ (249.6) Funded Ratio 93.6% 93.3% 93.5% 1 This amount represents the Net Assets Available for Benefits (basic benefits portion; excludes Pension Adjustment Account) and the present value of certain annual payments to be received from the Province of Manitoba on account of amendments made to The Teachers Pensions Act in 1970 and The future payments from the Province had a present value of $27.1 million as at January 1, This amount is not carried as an asset on the Statement of Financial Position. 2 This amount represents the present value of all contributions expected to be received in the future from members of the plan as at January 1, 2013 and incorporates the member contribution rate increase announced in FUNDING STATUS TRENDS An actuarial funding valuation only captures the plan s funding status at a single point in time. As the funding status can fluctuate by large amounts over time, it is useful to look at the valuation result trends. Accordingly, we have set out below the funding status of Account A since (%) Fully Funded Highest: 105.6% as at January 1, 1990 Lowest: 88.0% as at January 1, Valuation Year (as at January 1) Actual Extrapolated TRAF s Actuarial Funding Valuations are available on our website. FUNDING STATUS 23

26 PROJECTION VALUATION In addition to the funding valuation, TRAF also prepares a projection valuation. The primary difference between these two forms of valuation is that a funding valuation only considers the members in the plan as at the date of the valuation, whereas a projection valuation also considers new entrants over the projection period. As in the past, TRAF also projects the plan s funding status under different investment return scenarios. The actuarial projection valuation as at January 1, 2012 indicated that, considering the recent contribution rate increase and assuming that all other assumptions were realized, the plan would be fully funded at the beginning of 2032 if the net annualized investment return from January 1, 2012 until the end of 2031 was 7.05% or more. While this is within a reasonable range of possibilities, it is at least equally likely that further contribution rate increases (or benefit reductions) will be required to better ensure the long-term sustainability of the plan. FUNDING POLICY TRAF s funding policy establishes a targeted funding status of 100% to 110%. If the plan s funding status as determined through the triennial valuation is outside of this range, then the policy requires that the plan actuary be requested to provide the contribution rate required to meet the low end of the targeted funding status (ie. 100%) and also the contribution rate required to meet the high end of the targeted funding status (ie. 110%). The plan actuary has determined that the member contribution rate would need to be increased by a further 2% of salary to achieve a funding status of 100% and by 3.5% of salary to achieve a funding status of 110%. These requirements are as at the date of the projection valuation and are over and above the 2% member contribution rate increase currently being phased in. The plan actuary was also asked for a recommendation regarding a contribution rate increase and the rationale for such recommendation. By letter dated August 30, 2012, the plan actuary opined that, as an annual net investment return of 7.05% is within reasonable range of possible outcomes, there should be no further increase in the member contribution rate (other than the previously announced increases that are currently being implemented) between now and the next scheduled actuarial valuation (January 1, 2015). The plan actuary did qualify this opinion by stating that the financial position of the plan should continue to be monitored on an ongoing basis to ensure that the contribution levels under the plan are anticipated to be able to pay for the promised benefits. 24 TEACHERS RETIREMENT ALLOWANCES FUND

27 2012 ANNUAL REPORT EMPLOYER TRUST ACCOUNTS MTS TRUST ACCOUNT The actuarial valuation of the MTS Trust Account as at January 1, 2012 disclosed actuarial assets of $6,082,000 and actuarial liabilities of $6,451,000, resulting in a deficit of $369,000. Based on the extrapolation methodology provided by the plan actuary, the liabilities of the MTS Trust Account at January 1, 2013 were estimated to be $6,600,000. The assets held in the MTS Trust Account at January 1, 2013 were $6,362,000 as outlined in the chart below, with a resulting deficit of $238,000 on an extrapolated basis. MTS continues to make the required contributions as recommended by the plan actuary. MTS ACCOUNT ACTIVITY ($ thousands) Balance at Beginning of Year $ 6,082 $ 6,037 Contributions Net Investment Return Benefits Paid (439) (392) Expenses Balance at End of Year $ 6,362 $ 6,082 MSBA TRUST ACCOUNT The actuarial valuation of the MSBA Trust Account as at January 1, 2012 disclosed actuarial assets of $187,000 and actuarial liabilities of $275,000 resulting in a deficit of $88,000. Based on the extrapolation methodology provided by the plan actuary, the liabilities of the MSBA Trust Account at January 1, 2013 were estimated to be $257,000. The assets held in the MSBA Trust Account at January 1, 2013 were $168,000 as outlined in the chart below, with a resulting deficit of $89,000 on an extrapolated basis. MSBA did not make any contributions in 2012 as it had no active members in the plan. MSBA ACCOUNT ACTIVITY ACCOUNT B As at January 1, 2012, Account B had accrued liabilities (including those for Cost of Living Adjustments) of approximately $3.0 billion. Based on the extrapolation methodology provided by the plan actuary, the liabilities of Account B at January 1, 2013 were estimated to be approximately $3.1 billion. While there are no assets held in Account B, the PMTA, which was established to support the Province s liabilities under Account B, had assets of approximately $1.8 billion at January 1, Please refer to the next section of this report for more information on the PMTA. The chart below outlines the activity in Account B during ACCOUNT B ACTIVITY ($ millions) Balance at Beginning of Year $ (14.5) $ (13.6) Transfers from PMTA Net Investment Return Transfers to Account A (161.4) (157.1) Expenses Balance at End of Year $ (14.5) $ (14.5) ACCOUNT B STATUS The table below illustrates the ratio of the PMTA assets to the deficit of Account B (including the Cost of Living Adjustments) for each year that TRAF has conducted an actuarial valuation of Account B (the first of which was in 2001). The current ratio is approximately 57.2%. (%) ($ thousands) Balance at Beginning of Year $ 187 $ 215 Contributions Net Investment Return 15 6 Benefits Paid (34) (34) Expenses Balance at End of Year $ 168 $ Valuation Year (as at January 1) Actual Extrapolated FUNDING STATUS 25

28 NEXT STEPS Notwithstanding the magnitude of the deficit disclosed by the January 1, 2012 funding valuation, by virtue of an exemption from the funding requirements contained in the regulations to The Pension Benefits Act, no specific funding obligations are triggered. However, the results of the valuation, as well as detailed commentary and supplemental sensitivity analyses, have been provided to the Province of Manitoba and MTS. The Board has specifically indicated that future member contribution rate increases should be contemplated and, ideally, the Province and MTS should agree in advance on the maximum contribution rate that would be acceptable, should an increase be required. If an adequate level of funding cannot be achieved through investment returns (realized and expected) and acceptable member contribution rate increases, the Province and MTS should consider how benefit levels could be adjusted in the future to achieve an adequate level of funding. In the meantime, the plan continues to operate in the normal course. Pension payments will continue and new pensions will be determined under the same benefit formula. No material changes have been made to our investment program, although ongoing reviews continue. Copies of the actuarial reports regarding the Fund are available to members from our office upon request. 26 TEACHERS RETIREMENT ALLOWANCES FUND

29 Province of Manitoba Trust Account 2012 ANNUAL REPORT HIGHLIGHTS 2012 deposits totaled $77.4 million 2012 transfers to Account B were $161.4 million Account balance increased by $64.8 million to approximately $1.8 billion As previously reported, the Province of Manitoba established a trust account in 2001 for the purpose of accumulating funds for the eventual elimination of the Province s unfunded pension obligations. In 2008, the terms of the trust were amended to make the trust irrevocable. The result of this amendment is that the assets in the Province of Manitoba Trust Account (PMTA) may only be used to fund the Province s pension obligations under The Teachers Pensions Act (TPA). As at December 31, 2012, the assets in the PMTA totaled approximately $1.8 billion. DEPOSITS The Province makes monthly deposits to the PMTA in amounts sufficient to match all current member contributions, other than those employed by MTS. In 2012, the Province deposited $77.4 million into the PMTA. INVESTMENT RETURN The funds held in the PMTA are commingled with the plan assets for investment purposes. The PMTA is credited with its proportionate share of investment earnings, less its share of internal and external investment management costs (but not plan administration costs). In 2012, the net investment gains in the PMTA were $148.8 million. In addition, to the extent that the interest crediting formula in the TPA results in the Pension Adjustment Account (PAA) being credited with interest greater than the rate of return on Account A, the cost of such preferred return to the PAA is borne by Account A and the PMTA on a pro-rata basis. TRANSFERS TO ACCOUNT B In 2007, the Province commenced funding its monthly pension obligations by way of transfers from the PMTA. During 2012, $161.4 million was transferred from the PMTA to Account B for this purpose. PMTA BALANCE ($ millions) 2,000 1,500 1, PMTA ACTIVITY ($ millions) Balance at Beginning of Year $ 1,721.3 $ 1,752.9 Deposits (match of member contributions to Account A) Transfers to Account B (50% of benefits paid) (161.4) (156.2) Net Investment Return Balance at End of Year $ 1,786.1 $ 1,721.3 PROVINCE OF MANITOBA TRUST ACCOUNT 27

30 Cost of Living Adjustments HIGHLIGHTS 2012 COLA was 0.97% 2013 COLA limited by 2/3 CPI cap and therefore will be 0.55% Restricted surplus is approximately $4.8 million 2012 portion of member contributions allocated to the PAA was $13.4 million PAA interest rate was 10.18%, which increased the PAA assets by $20.3 million The TRAF pension plan grants Cost of Living Adjustments (COLA) to the extent that they can be funded by a designated account known as the Pension Adjustment Account (PAA). The PAA was established in 1977 for the purpose of financing one-half of the COLAs granted to retired members. The Province finances the other half of the COLAs as benefit payments are made. FUNDING THE PAA The PAA is currently allocated 16.7% of all member contributions. In 2012, this amounted to $13.4 million. The percentage of member contributions allocated to the PAA will continue to increase by 0.1% every five years until the percentage reaches 17.0%. The next scheduled increase will occur on September 1, The PAA is also credited with interest on its account balance. From its creation in 1977 until the end of 2006, the PAA was credited with interest equal to the net investment returns of the Fund s mortgage, bond and debenture holdings, compounded semi-annually. However, the applicable legislation was amended in 2008 to change the interest crediting formula. Starting with 2007 and continuing until 2016, the method used to determine the interest rate to be credited to the PAA in each year is as follows: For the current year and each of the two prior years, the net rate of return on fixed income investments (which includes mortgages, bonds, debentures and similar instruments) will be compared to the net rate of return on all investments, and the greater of these two rates will be selected as the PAA rate for that year. The PAA rate for each of these three years will then be averaged. This three-year average rate will be used to calculate the interest rate to be credited to the PAA for the current year. The interest rate credited in any year is used as part of the formula to determine the COLA to be granted in the following year. Accordingly, the 2012 interest credit of 10.18% was a factor in determining the 2013 COLA. In 2017, the interest rate credited to the PAA will be the average net rate of return on all investments for 2017 and the prior two years. This formula will continue for future years. While moving to an interest rate equal to the return on all investments is expected to create greater volatility in the amount of future COLA granted, this volatility will be dampened or smoothed by maintaining the three-year averaging mechanism. Net Rate of Return Net Rate of Return for Greater of Net Rate 3-Year Average Year for Fixed Income all Fund Investments of Return (PAA Rate) of the PAA Rate % 10.32% 10.32% 8.09% % 2.99% 11.27% 10.65% % 8.96% 8.96% 10.18% 28 TEACHERS RETIREMENT ALLOWANCES FUND

31 2012 ANNUAL REPORT PENSION ADJUSTMENT ACCOUNT INTEREST RATE (%) % % 8.14% 8.09% 10.65% 10.18% 5-Year Annualized Net Interest Rate was 8.7% % 6.88% 5.23% 6.47% 10-Year Annualized Net Interest Rate was 8.2% DETERMINING THE COLA Once interest for the year has been credited to the PAA, the plan actuary conducts a valuation to determine the current liabilities for all prior COLAs. Liabilities are valued based on a discount rate recommended by the plan actuary. The current discount rate is 3.75%. If such liabilities are less than the assets in the PAA, the resulting surplus will be used to support a further COLA. The plan actuary will determine the maximum amount of COLA that the surplus in the PAA can support. COLA is then applied on July 1 to both the original base pension as well as all previously granted COLAs. Members who have been receiving pension payments for less than 18 months as of July 1 will receive a pro-rated COLA. Beneficiaries of deceased members receive an adjustment to their payments equal to 2/3 of the COLA granted. LIMITS ON COLA Until 2017, the COLA in each year will be set at the lesser of: The maximum percentage the surplus in the PAA can support; and The lesser of (a) 5.33%, and (b) 2/3 of the percentage increase in the core Consumer Price Index (CPI) for Canada, December over the preceding December. Starting in 2018, COLA will be set at the lesser of the maximum percentage the PAA can support and the full CPI. The 2/3 of CPI maximum will no longer apply. Any surplus arising in the PAA as a result of the CPI-related cap described above ( restricted surplus ) is to be set aside as a reserve and may only be used for determining COLA to be granted after 2017 (ie. for COLAs granted on or after July 1, 2018). However, the interest earned on such restricted surplus may be used to support additional COLA before COLA can never be negative. PAA ACTIVITY ($ millions) Balance at Beginning of Year $ $ Member Contributions Pension Payments (COLA Portion) (17.6) (16.7) Net Investment Return Balance at End of Year $ $ COST OF LIVING ADJUSTMENTS 29

32 CPI COLA COMPARISON (%) year average CPI was 1.83% year average COLA was 0.73% CPI - Canada, Prior Year COLA Granted 2012 COLA The plan actuary determined that there was an actuarial surplus of $20.0 million available to support a COLA as at July 1, This surplus provided for a COLA in the amount of 0.97%. As the relevant increase in CPI for 2011 was 2.30%, the 2/3 cap of 1.53% did not restrict the COLA COLA The plan actuary determined that there was an actuarial surplus of $17.1 million available to support COLA of 0.76% effective July 1, However, since the relevant increase in CPI for 2012 was 0.83%, the maximum COLA allowed was restricted by the 2/3 CPI cap, which resulted in a COLA grant of 0.55%. As a result of the cap limiting the amount of COLA granted, there is a restricted surplus in the PAA of approximately $4.8 million. As annual pension payments increased to $316 million in 2012, this COLA will increase the aggregate pension payroll by approximately $1.7 million per annum. In 2012, total COLA payments were $17.6 million, representing approximately 5.6% of total pension payments. Please also refer to the 10-Year Data Summary located in this report for details of the COLAs granted since TRAF s PAA Valuations are available on our website. FUTURE COLA Given the number of variables involved, it is extremely difficult to predict the amount of future COLAs. While the improved interest crediting formula and recently announced increase to the member contribution rate will result in larger COLAs over the long term, members are cautioned that there is no certainty of a COLA in any given year and the long-run average COLA could be significantly below the corresponding increase in CPI. The projection valuation of the PAA completed in 2012 suggests that COLAs averaging approximately 1.0% over the long term could be granted under the current plan structure, subject to annual fluctuations and the fact that the COLA granted in any given year cannot exceed the limit prescribed in The Teachers Pensions Act (TPA). However, future COLAs are not guaranteed and are generally not pre-funded (although any restricted surplus that accumulates prior to 2018 will essentially pre-fund a portion of future COLAs). 30 TEACHERS RETIREMENT ALLOWANCES FUND

33 Investments 2012 ANNUAL REPORT HIGHLIGHTS 2012 gross return was 9.3% compared to a benchmark return of 9.9% TRAF ranked in the third quartile in 2012, and in the second quartile over five-year period Over the past five years, our gross return has exceeded the return of the median comparable fund by 0.4% per annum Our 10-year annualized return from 2003 to 2012 was 8.1% (7.8% on a net basis), which is above the 6.25% expected net rate of return assumed in the 2012 actuarial funding valuation COMPARATIVE INVESTMENT RETURN As at December 31 (%) % 9.9% 9.3% Have the gross return exceed the aggregate return of the index-based benchmark portfolio by 50 basis points (0.5%) per annum; Have the gross return exceed the median gross return of 8 8.1% 7.7% 7.1% a universe of comparable balanced funds as calculated by an independent provider of performance measurement services; and 6 Achieve the 6.25% expected net rate of return assumed in the actuarial valuation report of Account A as of 4 4.1% 4.1% 3.7% January 1, Year 5-Year 10-Year TRAF Investment Return TRAF Benchmark Return (comparison to markets) Median Return of Comparable Plans (comparison to peers) OBJECTIVES The general investment objective is to obtain the highest rate of return within the risk parameters established by the Statement of Investment Policies & Procedures (SIP&P) approved by the Board. The specific investment objectives for the Fund over the long term as measured over rolling five-year periods are as follows: The first objective of exceeding the benchmark return is a measure of the aggregate performance of the investment managers selected to make investments on behalf of the plan (although deviations from our policy asset mix can also contribute). Over the past five years, our gross return has been equal to the benchmark. While we are disappointed at not achieving the excess return target, we recognize that this is difficult to do at the plan level on a consistent basis. Furthermore, the Board has been reducing its reliance on active management by increasing the plan s use of low cost passive investment strategies which, by design, will not deliver excess return (but will also avoid delivering returns materially under the benchmark). At the end of 2012, approximately 24% of TRAF s portfolio was in passive strategies, compared to 0% at the beginning of The use of passive strategies is subject to ongoing review and consideration by the Investment Committee. However, the objective of exceeding the total plan benchmark by 0.5% is more difficult to achieve as the utilization of passive strategies increases. INVESTMENTS 31

34 We are less tolerant, however, of individual investment managers that have either not delivered their targeted level of excess return, or are not expected to be able to deliver it on a go-forward basis. In 2012, TRAF terminated two investment managers as we did not have the necessary conviction that their respective strategies would deliver excess returns net of fees on a forward-looking basis. The second objective of having the total plan return above that of the median plan return assesses the Board s success in both establishing the plan s asset allocation and manager selection. TRAF has done well on this measure as our five-year gross return of 4.1% is in excess of the median plan return of 3.7%, placing us in the second quartile. While the factors for this result are varied, one significant contributor is the plan s relatively large allocation to real estate. At the end of 2012, TRAF held 16.4% of its assets in real estate. The third objective is perhaps the most critical to achieve. The long-term sustainability of the plan is predicated on achieving the assumed rate of return. The plan actuary, in consultation with the Board, establishes the rate of return assumption as part of the fund valuation process. In connection with the fund valuation completed in 2012, the plan actuary determined the plan s total expected return by multiplying the expected future return of each asset class by our target weight of that asset class. The result, after certain adjustments for various factors including investment management fees and a margin for adverse deviation, was 6.25% and this became the plan s assumed or expected rate of return (this is the same rate that was used in the 2009 valuation). For the five-year period ended December 31, 2012, our annualized net investment return was only 3.8%. However, it is noted that this period includes 2008, when the plan suffered its worst performance ever at negative 11.7%. If the measurement period is extended to 10 years, TRAF s annualized net investment return increases to 7.8%. Significant time and effort is spent each year analyzing our performance and determining what adjustments, if any, are required to our investment program or our assumptions regarding expected returns (or both). In 2012, we decided to make only minor refinements to our asset allocation for Specifically, we reduced our exposure to Canadian Equity by 1% and increased our allocation to Private Equity by 1% (which was consistent with the strategy adopted in 2002 to work towards a long-term target weight of 10% for Private Equity). INVESTED ASSETS Target (%) Actual (%) FIXED INCOME Cash & Short-Term Public Bonds (Universe) Public Bonds (Long) Mortgages High Yield Debt Private Debt Total REAL ESTATE INFRASTRUCTURE FIXED INCOME EQUITY Canadian Equity US Equity International Equity Private Equity Total REAL ESTATE INFRASTRUCTURE TOTAL 100.0% 100.0% EQUITY 32 TEACHERS RETIREMENT ALLOWANCES FUND

35 2012 ANNUAL REPORT ASSET ALLOCATION & BENCHMARKS A fundamental step in achieving our investment objectives is to have investment assets properly allocated among the various asset classes. Our target and actual allocations are set out in the table below. The applicable benchmarks are also indicated. For additional detail, please refer to the SIP&P, which is accessible on our website. Asset Class Benchmark (%) (%) ($ millions) FIXED INCOME Cash & Short-Term DEX 91-Day T-Bill Index Public Bonds (Universe) DEX Universe Bond Index Public Bonds (Long) DEX Long-Term Bond Index Mortgages 60% DEX Short-Term Bond Index and 40% DEX Mid-Term Bond Index, +0.5% High Yield Debt 50% Merrill Lynch Canadian Issuers Index and 50% Merrill Lynch US High Yield Master II Index ($Cdn) Private Debt DEX Universe Bond Index TOTAL FIXED INCOME ,656.6 EQUITY Canadian S&P/TSX 10% Capped Composite Index US Russell 3000 Index International MSCI All Country World Index (ex US) Private Equity-Oriented MSCI World Index +3% Debt-Oriented DEX Universe Bond Index +3% TOTAL EQUITY ,179.9 REAL ESTATE Canadian IPD Canadian Property Index TOTAL REAL ESTATE INFRASTRUCTURE Global CPI +5% TOTAL INFRASTRUCTURE TOTAL PORTFOLIO , Aggregate cash held by all investment managers. Target Actual GEOGRAPHIC ALLOCATION As certain components of our asset allocation, such as High Yield Debt, Private Equity and Infrastructure, cover multiple geographical areas, we have set out below our total plan level exposure by geography. REGION Actual (%) CANADA 66.9 US 16.7 INTERNATIONAL 16.4 Europe 9.6 Asia Pacific 3.7 Emerging Markets 3.1 TOTAL 100.0% CANADA US INTERNATIONAL INVESTMENTS 33

36 INVESTMENT MANAGERS TRAF does not actively manage any assets internally. Rather, we engage various investment managers to select the individual stocks, bonds and other securities for each asset class on our behalf. A complete list of our current investment managers and links to their respective websites are available on our website. TRAF terminated two investment managers in No new investment managers were added in The funds from the terminated managers were transitioned to existing index strategies. FIRM Amount Managed 1 ($ millions) Greystone Managed Investments Cash & Short-Term 88.8 Public Bonds (Universe) Mortgages Canadian Equity US Equity 79.6 Real Estate TD Asset Management Public Bonds (Long) Canadian Equity US Equity International Equity Dimensional Fund Advisors Canadian Equity 85.1 US Equity 50.6 International Equity 78.6 Emerging Markets Equity 99.8 Northleaf Capital Partners Private Equity Marret Asset Management High Yield Debt Adams Street Partners Private Equity Franklin Templeton Investments International Equity INTECH Investment Management US Equity Macquarie Funds Group Infrastructure 64.6 QV Investors Canadian Equity 60.0 Other Private Equity Infrastructure Amounts indicated are based on invested capital with the investment manager, except Private Equity and Infrastructure allocations, for which amounts are based on capital commitments. Total will be greater than invested assets as at December 31, Index mandate. Franklin Templeton Investments $163.8 INTECH Investment Management $145.8 Macquarie Funds Group $64.6 QV Investors $60.0 Other $261.5 Greystone Managed Investments $2,164.7 TD Asset Management $1,075.4 Dimensional Fund Advisors $314.1 Northleaf Capital Partners $295.2 Marret Asset Management $261.8 Adams Street Partners $ TEACHERS RETIREMENT ALLOWANCES FUND

37 2012 ANNUAL REPORT DETAILED PERFORMANCE RESULTS When assessing our results, the performance of each mandate is compared to the benchmark index that has been designated by the Investment Committee and approved by the Board. This quantitative analysis, together with other qualitative criteria, assists in the review of each investment manager. We also measure our overall portfolio performance against a weighted average of the passive benchmark returns based on our target allocations. The table below shows the gross returns for each asset class, the total portfolio return and the corresponding benchmark return for the one-year, five-year and 10-year periods ending December 31, ANNUALIZED PERFORMANCE SUMMARY 1 RETURNS (%) 1 YEAR 5 YEAR 10 YEAR TOTAL FUND Benchmark Value Added FIXED INCOME Benchmark Value Added Cash & Short-Term Benchmark Value Added Public Bonds (Universe) Benchmark Value Added Public Bonds (Long) Benchmark Value Added Mortgages Benchmark Value Added High Yield Debt Benchmark Value Added EQUITY Benchmark Value Added Canadian Benchmark Value Added US Benchmark Value Added International Benchmark Value Added Private Benchmark Value Added REAL ESTATE Benchmark Value Added INFRASTRUCTURE Benchmark Value Added Information compiled by BNY Mellon Asset Servicing, an independent provider of performance measurement services. Benchmark returns reflect the benchmarks used during the relevant time period. 2 Prior to 2008, Infrastructure returns were incorporated into Private Equity returns. Prior to 2006, Private Equity returns were incorporated into Canadian Equity returns. Includes Private Debt. INVESTMENTS 35

38 TRAF s assets are divided into four main asset classes Fixed Income, Equity, Real Estate and Infrastructure. FIXED INCOME The Fund s fixed income portfolio includes investments in cash and other short-term instruments, public bonds, mortgages, non-investment grade ( high yield ) debt and private debt. TRAF has four fixed income managers Greystone Managed Investments Inc. (Greystone), TD Asset Management Inc. (TDAM), Marret Asset Management Inc. and Penfund Management Inc. Approximately 24% of our fixed income holdings is invested in an index strategy managed by TDAM. All investments are Canadian, except our high yield debt portfolio where approximately 62% by value is from US issuers (and approximately 77% by value is denominated in US dollars). The US-based high yield debt holdings are generally hedged so the Fund has no material currency exposure in respect of its fixed income holdings. In 2012, our fixed income portfolio returned 4.7%. This was 0.8% less than the benchmark return of 5.5%. FIXED INCOME ASSET MIX PUBLIC BONDS BY TYPE PUBLIC BONDS BY RATING MORTGAGES BY SECTOR Private Debt 0.2% Municipal 1.8% Non-Investment Grade/Unrated 15.9% Mixed Use 8.7% Cash & Short-Term 5.3% Provincial 29.1% AAA 32.3% Office 30.2% Public Bonds (Universe) 30.2% Investment Grade Corporate 28.3% AA 23.5% Industrial 18.4% Public Bonds (Long) 24.2% Non-Investment Grade Corporate 16.7% A 21.6% Retail 23.9% Mortgages 24.3% High Yield Debt 15.8% Federal 24.1% BBB 6.7% Residential 18.8% 36 TEACHERS RETIREMENT ALLOWANCES FUND

39 2012 ANNUAL REPORT EQUITY Equity markets in general produced strong returns in In Canada, the S&P/TSX Composite Index was up 7.2%. Our Canadian equity managers collectively returned 8.7%. The US market also delivered impressive returns our return was 15.8% versus a benchmark return of 13.8%. Our international equity returns were higher yet at 18.2% versus a benchmark return of 14.8%. TRAF s public equity investments returned 13.6% in This was 2.2% over the benchmark return of 11.4%. While TRAF has six public equity managers, Greystone manages approximately 24% of our public equity holdings. Approximately 39% of our public equity holdings was invested in index strategies managed by TDAM at the end of Private equity underperformed our public equity, with a return of 9.0% versus a benchmark return of 15.7%. As a result, our total equity return, including both public and private holdings, was 12.6% versus a benchmark return of 12.3%. TOTAL EQUITY BY LOCATION TOTAL EQUITY BY SECTOR PRIVATE EQUITY BY INVESTMENT TYPE US 27.8% Canada 38.9% Utilities 2.9% Energy 14.6% Materials 10.3% Debt 1.6% Buyout 70.4% Financial Services 24.4% Health Care 7.6% International 33.3% Industrials 11.0% Information Technology 9.1% Telecommunication Services 3.9% Consumer Staples 6.3% Consumer Discretionary 9.9% Other 2.5% Venture 25.5% INVESTMENTS 37

40 REAL ESTATE In 2012, the real estate portfolio returned 12.5% which, while strong in absolute terms, trailed the benchmark return of 14.1%. All real estate holdings are located in Canada and managed by Greystone. Total portfolio leverage at the end of 2012 was slightly higher than 2011 (27.8% versus 25.3%). The maximum permitted leverage at the portfolio level remains at 50%. REAL ESTATE BY LOCATION REAL ESTATE BY SECTOR REAL ESTATE BY PROPERTY TYPE Quebec 3.7% Atlantic Canada 2.9% Alberta 28.6% Residential 9.5% Industrial 29.3% Opportunistic 9.4% Value Add 15.6% Core 70.5% Ontario 33.8% Retail 28.4% Office 32.8% Transition 4.5% British Columbia 19.5% Manitoba 5.2% Saskatchewan 6.3% Bramalea City Centre, Brampton, Ontario 5800 Explorer Drive, Mississauga, Ontario 160 Smith Street, Winnipeg, Manitoba 38 TEACHERS RETIREMENT ALLOWANCES FUND

41 2012 ANNUAL REPORT INFRASTRUCTURE In 2012, our infrastructure portfolio gained 7.0% versus a benchmark return of 5.8%. However, as infrastructure continues to be a small portion of the portfolio, comprising approximately 2%, the impact to the total portfolio was negligible. Macquarie Funds Group is responsible for managing approximately 42% of our infrastructure portfolio. Total portfolio leverage is approximately 50.6%, up slightly from 50.4% in INFRASTRUCTURE BY LOCATION INFRASTRUCTURE BY SECTOR INFRASTRUCTURE BY TYPE Australia 9.6% Transportation 37.1% Greenfield 11.0% US 18.2% Communications 28.6% Canada 32.6% Utilities 34.3% Brownfield 89.0% Europe 39.6% Through its investment in Macquarie Funds Group, TRAF has an indirect investment in Puget Sound Energy. Puget s Lower Snake River wind energy project in Washington State meets the total annual power requirements of approximately 100,000 households. INVESTMENTS 39

42 FOREIGN CURRENCY After considering all relevant factors, including the plan s long investment horizon and desire for diversification, TRAF has adopted the following policy: To hedge the foreign currency exposure related to holdings of non-canadian fixed income, and Not to hedge the foreign currency exposure related to holdings of non-canadian equity, real estate and infrastructure. In the case of non-canadian equity, the investment return and the relevant benchmark return are expressed in Canadian dollar terms, which provides an appropriate basis to measure performance. However, for infrastructure, TRAF had approximately 67% of its holdings at the end of 2012 located outside of Canada and denominated in currencies other than the Canadian dollar, whereas the benchmark of CPI plus 5% is based in Canadian dollars and on Canadian inflation. While this will create short-term deviations between our investment return and the benchmark return, we expect these annual deviations to significantly narrow over the long term. At the end of 2012, approximately $1.5 billion (32.6%) of the plan s total holdings were denominated in a currency other than the Canadian dollar. Of this, approximately $211.0 million related to fixed income securities and was hedged to Canadian dollars. Net foreign currency exposure was therefore approximately $1.3 billion (28.3%). PRIMARY CURRENCY EXPOSURES US Dollar 14.1% Euro 4.0% British Pound Sterling 2.8% SECURITIES LENDING TRAF has a securities lending program administered by our custodian, CIBC Mellon Global Securities Services. Under the program, we lend securities to borrowers approved by the custodian. The loans are secured by either cash or marketable securities. In 2012, TRAF earned $668,000 from the program, representing an increase of approximately 14% from the 2011 amount of $586,000. DIVERSIFICATION One of the primary strategies to reduce risk in our investment portfolio is maintaining an adequate level of diversification. TRAF s portfolio is diversified by asset class (and sectors within each asset class), geography, style of investment management, investment manager and individual securities. TRAF s largest asset class allocation is equities, with a target weighting of 46%. This is allocated globally with Canadian equities being the largest allocation at 16%. At the investment manager level, Greystone continues to have the largest total allocation from TRAF, directly managing approximately $2.2 billion (46% of our total portfolio) at the end of Our largest single company exposure at the end of 2012 was Toronto Dominion Bank, as we held 497,106 shares representing a total value of $41.6 million (which is less than 1% of the total portfolio). TRAF s top real estate holding is an interest in 50 Bloor Street West in Toronto. Our interest was valued at $43.1 million at the end of 2012, representing 5.6% of our total real estate holdings. The total number of direct holdings in the real estate portfolio was 102 at the end of Other 7.4% Canadian Dollar 71.7% 40 TEACHERS RETIREMENT ALLOWANCES FUND

43 2012 ANNUAL REPORT INVESTMENT COSTS It is common for pension plans to report investment returns on a gross (ie. before fees and expenses) basis, and the returns noted in this section of the report are presented on that basis unless otherwise noted. However, net returns are at least equally relevant to our members. Our investment related expenses for 2012 are set out in the table below, together with those of 2011 for comparison purposes. The investment manager fees are those paid to external managers for all asset classes other than private equity and infrastructure. The private equity manager fees are the base management fees charged in the year by fund-offunds private equity managers. These fees result from an outsourcing decision by TRAF and are therefore included in our investment related costs. Infrastructure manager fees are those paid in respect of our infrastructure co-investment strategy. The other expenses reflect that portion of the overall general expenses that were incurred in connection with investment related activities. The cost summary excludes management fees paid in respect of our direct fund (ie. non fund-of-funds) holdings for private equity and infrastructure, as well as any commissions paid in respect of trading publicly listed securities. However, all such costs have been deducted in determining our reported investment returns. That is, our 2012 return of 9.3% is after accounting for such costs. Year-over-year, our total investment related costs decreased by $321,000 (2.3%). To determine our costs per $100 of invested assets, the total investment related costs are divided by TRAF s average amount of invested assets throughout the year. Based on this methodology, our investment related costs in 2012 were 29 basis points, or $0.29 per $100 of invested assets. This is down $0.02 (6.4%) from Refer to the 10-Year Data Summary in this report for information on these costs since Based on publicly available reports and other sources of information, TRAF s investment related costs are in line with other plans of similar size and structure. After accounting for these costs, TRAF s net investment return for 2012 was 9.04%. After the deduction of administrative expenses of $3.4 million (outlined on page 18), the net plan return was 8.96%. Pursuant to applicable legislation, this is the rate of return which is used for a number of purposes, including the interest credit for each of the Pension Adjustment Account, MTS Trust Account and MSBA Trust Account, as well as certain benefit calculations. INVESTMENT EXPENSE SUMMARY Change ($ thousands) $ % Investment Manager Fees $ 7,883 $ 8,227 (344) (4.2) Private Equity Manager Fees 3,402 3,496 (94) (2.7) Infrastructure Manager Fees (332) (77.9) Salaries and Benefits Office and Administration Custody and Banking Communications (2) (12.5) Travel Professional Fees (20) (9.4) Board and Committees Portfolio Oversight Total $ 13,489 $ 13,810 $ (321) (2.3)% 1 Includes a one-time credit in the amount of $124, Includes items such as consulting fees for strategic initiatives at the overall portfolio level, due diligence activities in respect of sourcing new and monitoring existing investment managers and certain custom reports that are prepared for TRAF by third parties to assist in our portfolio monitoring activities. Staff travel expenses related to these activities are also included. INVESTMENTS 41

44 Summary of Portfolio Holdings FIXED INCOME HOLDINGS CASH & SHORT-TERM TYPE % Treasury Bills 62 Bankers Acceptances 38 Floating Rate Notes PUBLIC BONDS (UNIVERSE) TYPE % Federal 30 Provincial 31 Corporate 36 Municipal PUBLIC BONDS (LONG) TYPE % Federal 27 Provincial 46 Corporate 26 Municipal MORTGAGES SECTOR % Industrial 18 Office 30 Residential 19 Retail 24 Mixed Use HIGH YIELD DEBT SECTOR % Automotive 3 Banking 0 Basic Industry 15 Capital Goods 1 Consumer Cyclical 4 Consumer Non-Cyclical 6 Energy 13 Financial Services 1 Health Care 7 Insurance 2 Media 14 Real Estate 1 Services 10 Technology & Electronics 2 Telecommunications 15 Utilities REGION % Canada 38 US PROPERTY LOCATION % Ontario 43 Alberta 24 British Columbia 14 Quebec 10 Atlantic Canada 4 Saskatchewan 4 Manitoba NOTE All assets managed by TRAF are commingled for investment purposes. Accordingly, the percentage breakdowns noted in this summary are consistent across all accounts. Dollar amounts include all holdings. Total investment holdings as at December 31, 2012, were valued at $4,699,241,489. Of this amount, 62.0% relates to the pension plan and 38.0% represents assets held in the Province of Manitoba Trust Account. Please refer to the audited financial statements for the breakdown by dollar amounts. In certain cases, TRAF does not directly hold title to the individual securities noted but, rather, owns interests in one or more pooled investment vehicles which in turn holds title to such securities. In these situations, the information in this summary shows TRAF s indirect holdings and equivalent economic interests in the underlying securities. 42 TEACHERS RETIREMENT ALLOWANCES FUND

45 2012 ANNUAL REPORT EQUITY HOLDINGS CANADIAN EQUITY MARKET VALUE TOP 10 HOLDINGS ($ thousands) % 1 Toronto Dominion Bank 41, Bank of Nova Scotia 30, Bank of Montreal 27, Suncor Energy Inc. 26, Royal Bank of Canada 25, TransCanada Corporation 20, Manulife Financial Corporation 19, Enbridge Inc. 19, Goldcorp Inc. 19, Canadian National Railway Company 15, Of total Canadian Equity holdings. US EQUITY MARKET VALUE TOP 10 HOLDINGS ($ thousands) % 1 Chevron Corporation 8, Exxon Mobil Corporation 8, General Electric Company 8, Apple Inc. 8, Pfizer Inc. 7, JP Morgan Chase & Company 6, AT&T Inc. 6, Cisco Systems Inc. 4, Berkshire Hathaway Inc. 4, US Bancorp Inc. 4, Of total US Equity holdings. SECTOR % Energy 25 Materials 17 Industrials 7 Consumer Discretionary 6 Consumer Staples 4 Health Care 2 Financials 32 Information Technology 2 Telecommunication Services 3 Utilities SECTOR % Energy 11 Materials 4 Industrials 10 Consumer Discretionary 13 Consumer Staples 8 Health Care 10 Financials 22 Information Technology 14 Telecommunication Services 3 Utilities SUMMARY OF PORTFOLIO HOLDINGS 43

46 EQUITY HOLDINGS INTERNATIONAL EQUITY MARKET VALUE TOP 10 HOLDINGS ($ thousands) % 1 Royal Dutch Shell PLC 8, Roche Holdings AG 7, Nestle SA 7, Samsung Electronics Company Ltd. 6, BP Group PLC 6, Toyota Motor Corporation 6, HSBC Holdings PLC 6, Vodafone Group PLC 6, Total SA 5, Bayer AG 5, Of total International Equity holdings. REGION % Europe (except UK) 38 UK 18 Asia Pacific (except Japan) 10 Japan 15 Emerging Markets SECTOR % Energy 9 Materials 11 Industrials 14 Consumer Discretionary 12 Consumer Staples 8 Health Care 8 Financials 22 Information Technology 7 Telecommunication Services 6 Utilities PRIVATE EQUITY COMMITTED 1 HOLDINGS BY MANAGER ($ thousands) % 2 Northleaf Capital Partners 3 295, Adams Street Partners 3 259, Torquest Partners 30, Top Tier Capital Partners 3 29, TD Capital Mezzanine Partners 3 25, CAI Capital Partners 20, Imperial Capital Management 20, Richardson Capital 14, Penfund Management 10, CentreStone Ventures 10, Tricor Pacific Capital Partners 10, TriWest Capital Partners 5, , Non-Canadian dollar denominated unfunded commitments have been converted to Canadian dollars at December 31, Non-Canadian dollar denominated funded commitments have been converted to Canadian dollars at the transaction date. 2 Of total Private Equity commitments in the 10-year period ended December 31, Indicates fund-of-funds manager. REGION 1 % Canada 24 US 53 Europe 15 Asia Pacific/Rest of World Based on portfolio company investment value at September 30, 2012 (fund investment value for fund-of-funds investments). SECTOR 1 % Energy 8 Materials 4 Industrials 15 Consumer Discretionary 12 Consumer Staples 6 Health Care 14 Financials 14 Information Technology 20 Telecommunication Services 4 Utilities Based on portfolio company investment value at September 30, 2012 (fund investment value for fund-of-funds investments). INVESTMENT TYPE 1 % Buyout 70 Venture 26 Debt 2 Other Based on fund value and strategy at September 30, TEACHERS RETIREMENT ALLOWANCES FUND

47 2012 ANNUAL REPORT REAL ESTATE HOLDINGS MARKET VALUE 1 TOP 10 HOLDINGS ($ thousands) % 2 50 Bloor Street West (Toronto) 43, Bramalea City Centre (Brampton) 28, Gateway Industrial Park (Edmonton) 23, Discovery Place (Vancouver) 22, Crossroads Shopping Centre (Winnipeg) 21, Uptown (Victoria) 19, th Street Business Park (Edmonton) 19, Scotia Place (Edmonton) 17, Seven Oaks Shopping Centre (Vancouver) 16, Stock Exchange Tower (Calgary) 16, Appraised value of TRAF s interest, adjusted for proportionate share of working capital and mortgage debt. 2 Of total Real Estate holdings. SECTOR % Office 33 Industrial 29 Retail 28 Residential PROPERTY LOCATION % Ontario 34 Alberta 29 British Columbia 19 Saskatchewan 6 Manitoba 5 Quebec 4 Atlantic Canada INVESTMENT TYPE % Core 71 Value Add 16 Opportunistic 9 Transition INFRASTRUCTURE HOLDINGS COMMITTED 1 HOLDINGS BY MANAGER ($ thousands) % 2 Macquarie Funds Group 64, Kindle Capital Management 40, Aquila Infrastructure Management 30, CFI Capital 16, , Non-Canadian dollar denominated unfunded commitments have been converted to Canadian dollars at December 31, Non-Canadian dollar denominated funded commitments have been converted to Canadian dollars at the transaction date. 2 Of total Infrastructure holdings. REGION 1 % Canada 33 US 18 Europe 40 Australia Based on portfolio company investment value at September 30, SECTOR 1 % Utilities 34 Transportation 37 Communications 29 Social Based on portfolio company investment value at September 30, INVESTMENT TYPE 1 % Brownfield 89 Greenfield Based on portfolio company investment value at September 30, PORTFOLIO LOAN-TO-VALUE RATIO 50.6% PORTFOLIO LOAN-TO-VALUE RATIO 27.8% SUMMARY OF PORTFOLIO HOLDINGS 45

48 10-Year Data Summary (AS AT DECEMBER 31 UNLESS OTHERWISE NOTED; NUMBERS MAY NOT ADD DUE TO ROUNDING) FINANCIAL STATEMENT DATA ($ millions) Inflows Member Contributions Provincial Contributions Investment Income (326.1) Other Contributions (eg. reciprocal transfers) Total (121.6) Outflows Pension Payments Other Payments (eg. refunds, reciprocal transfers) Administrative Expenses Total Net Increase (Decrease) (396.1) Assets Available for Benefits Basic Benefit Account 1, , , , , , , , , ,740.9 Pension Adjustment Account Total 2, , , , , , , , , ,958.9 Province of Manitoba Trust Account New Teacher Account n/a 3 n/a 3 n/a 3 n/a 3 General Account , ,520.2 n/a 3 n/a 3 n/a 3 n/a 3 Total , , , , , , Net of investment management fees and allocation to trust accounts. 2 Prior to 2007, this amount included the expenses categorized as Other Investment Related Expenses under Investment Costs. 3 The PMTA Agreement was amended effective December 31, As a result, the New Teacher Account is no longer tracked separately. MEMBERSHIP DATA Membership Active Members¹ 14,819 14,937 14,975 14,983 14,987 15,122 15,055 15,155 15,215 15,403 Retired Members 9,048 9,575 10,134 10,663 11,139 11,603 11,950 12,415 12,813 13,149 Deferred Members 7,143 7,185 7,417 6,259 6,019 6,283 6,523 6,478 6,898 6,996 Total 31,010 31,697 32,526 31,905 32,145 33,008 33,528 34,048 34,926 35,548 Active to Retired Ratio 1.6:1 1.6:1 1.5:1 1.4:1 1.3:1 1.3:1 1.3:1 1.2:1 1.2:1 1.2:1 New Retired Members Active Members Deferred Members Total New Active Members Disabled Members Member Deaths Active and Deferred Members Retired Members Total Administrative Cost per Member 2 $109 $118 $131 $121 $114 $113 $117 $129 $121 $119 1 Data prior to 2009 as at July 31. Represents members who have accrued pensionable service during Based on Active and Retired Members only (ie. excluding Deferred Members). 46 TEACHERS RETIREMENT ALLOWANCES FUND

49 2012 ANNUAL REPORT INVESTMENT DATA Investments ($ millions) Fixed Income Cash & Short-Term Public Bonds (Universe) , Public Bonds (Long) Mortgages High Yield Debt Private Debt Equity Canadian US International Private Real Estate Canadian Infrastructure Global Total 2, , , , , , , , , ,699.2 Investment Costs Investment Manager Fees Private Equity Manager Fees² Infrastructure Manager Fees Other Investment Related Expenses Total Investment Costs per $100 of Assets 4 $0.22 $0.24 $0.23 $0.26 $0.26 $0.28 $0.31 $0.33 $0.31 $0.29 Investment Performance (%) Gross Rate of Return (11.7) Benchmark Return (14.3) Value Added before Investment Costs (%) (1.2) (3.7) (0.6) Median Return of Comparable Plans (%) (16.4) Quartile Ranking 5 3rd 1st 1st 1st 1st 1st 4th 2nd 2nd 3rd Net Rate of Return after All Costs (%) (11.96) Includes Province of Manitoba Trust Account. ² Private Equity manager fees are the base fees charged in the year by fund-of-funds private equity managers. ³ Infrastructure manager fees are those paid in respect of our infrastructure co-investment strategy. 4 Costs are based on an asset level equal to the midpoint between the value of the respective year s opening and closing total investments. 5 Based on the BNY Mellon Asset Servicing database for calendar years 2008 and thereafter. Prior thereto, based on the Towers Perrin database. 6 Net of both investment and administrative costs. VALUATION DATA ($ millions) Basic Benefit Account (as of January 1) Surplus/(Deficit) Valuation Years Only (126.5) (12.9) (391.4) (307.1) Rate of Return Assumption (net) (%) Inflation Assumption (%) COST OF LIVING ADJUSTMENT (COLA) DATA Consumer Price Index (CPI) Prior Year (%) COLA Granted (%) COLA Granted (% of CPI) YEAR DATA SUMMARY 47

50 Audited Financial Statements MANAGEMENT RESPONSIBILITY FOR THE FINANCIAL STATEMENTS The accompanying financial statements of the Teachers Retirement Allowances Fund and all the information in this Annual Report are the responsibility of management and have been approved by the Board. The financial statements include some amounts, such as the market value of investments, that are necessarily based on management s best estimates and judgement. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles. In discharging its responsibility for the integrity and fairness of the financial statements, management maintains the internal control systems and practices necessary to provide reasonable assurance that transactions are authorized, assets are safeguarded and proper records are maintained. The firm of Aon Hewitt has been appointed the independent consulting actuary to the Fund. The role of the actuary is to complete an actuarial valuation of the Fund in accordance with accepted actuarial practice; the results of the valuation and extrapolation thereof are included in the financial statements. Ultimate responsibility for the financial statements rests with the Board, which is assisted in its responsibilities by the staff and the Audit Committee. The Audit Committee is comprised of two Board members and one external member. The Audit Committee reviews the Auditor s Report and the financial statements and makes recommendations to the Board concerning approval. The Fund s independent external auditor, the Auditor General of Manitoba, is responsible for auditing the financial statements of the Fund and for issuing their report thereon. The Auditor General has full and unrestricted access to the Audit Committee. Jeff Norton, LLM, CFA President & CEO David Asselstine, CA IFA, CFE Vice President, Finance & CRO March 18, 2013 Winnipeg, Manitoba 48 TEACHERS RETIREMENT ALLOWANCES FUND

51 INDEPENDENT AUDITOR S REPORT To the Legislative Assembly of Manitoba To the Board of the Teachers Retirement Allowances Fund We have audited the accompanying financial statements of the Teachers Retirement Allowances Fund, which comprise the statement of financial position as at December 31, 2012, the statements of changes in net assets available for benefits and changes in pension obligations for the year then ended, and 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 pension plans and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s 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 the auditor's 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, the auditor considers 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 statement of financial position of the Fund as at December 31, 2012, the changes in net assets available for benefits, and the changes in pension obligations for the year then ended in accordance with Canadian accounting standards for pension plans. Original document signed by Carol Bellringer March 18, 2013 Winnipeg, Manitoba Carol Bellringer, FCA, MBA Auditor General AUDITED FINANCIAL STATEMENTS 49

52 TEACHERS RETIREMENT ALLOWANCES FUND STATEMENT OF FINANCIAL POSITION AS AT DECEMBER 31, 2012 ($ thousands) MTS MSBA Province of Trust Trust Manitoba Account A Account B Account Account Trust Account Total Total Assets Investments, Note 3 $ 2,906,633 $ $ 6,362 $ 168 $ 1,786,078 $ 4,699,241 $ 4,470,222 Investment income receivable 39,612 39,612 28,213 Receivable for settlement of outstanding trades 113 Contributions and other receivables, Note 5 6,319 6,319 5,354 Due from (to) interfund accounts 14,545 (14,545) Cash 15,045 15,045 12,740 Computer and office equipment, Note Prepaid expense Total Assets 2,982,321 (14,545) 6, ,786,078 4,760,384 4,516,744 Liabilities Accrued liabilities 7,329 7,329 6,609 Payable for settlement of outstanding trades 6,409 6,409 Money Purchase Accounts, Note 9 4,734 4,734 4,046 Province of Manitoba Trust Account, Note 11 1,786,078 1,786,078 1,721,277 Provision for Fund s share of employees pension benefits, Note 12 4,892 4,892 4,489 Total Liabilities 23,364 1,786,078 1,809,442 1,736,421 Net Assets Available for Benefits 2,958,957 (14,545) 6, ,950,942 2,780,323 Pension obligations, Note 21 3,169,470 3,107,472 6, ,283,799 5,958,635 Surplus (Deficit) $ (210,513) $ (3,122,017) $ (238) $ (89) $ $ (3,332,857) $ (3,178,312) The accompanying notes are part of these financial statements. On behalf of the Board Mal Anderson, CA Chair Ray Desrochers, CA Board Member 50 TEACHERS RETIREMENT ALLOWANCES FUND

53 TEACHERS RETIREMENT ALLOWANCES FUND STATEMENT OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS AS AT DECEMBER 31, ANNUAL REPORT ($ thousands) MTS MSBA Trust Trust Account A Account B Account Account Total Total Increase in Assets Contributions $ 81,088 $ $ 185 $ $ 81,273 $ 75,554 Province of Manitoba Trust Account, Note , , ,187 Transfer for benefits charged to Account B 161,379 (161,379) Other contributions, Note 13 3,268 3,268 3,560 Net investment income, Note , , ,115 Change in fair value of investments, Note , ,272 (12,217) Total Increase in Assets 501, , ,199 Decrease in Assets Benefits paid 315, , ,566 Refunds 9,286 9,286 14,077 Transfers under reciprocal agreements 2,706 2,706 4,439 Administrative expenses, Note 18 3,838 3,838 3,797 Total Decrease in Assets 330, , ,879 Increase (Decrease) in Net Assets for the Year 170, (19) 170, Net Assets Available for Benefits, Beginning of Year 2,788,606 (14,552) 6, ,780,323 2,780,003 Net Assets Available for Benefits, End of Year $ 2,958,957 $ (14,545) $ 6,362 $ 168 $ 2,950,942 $ 2,780,323 The accompanying notes are part of these financial statements. AUDITED FINANCIAL STATEMENTS 51

54 TEACHERS RETIREMENT ALLOWANCES FUND STATEMENT OF CHANGES IN PENSION OBLIGATIONS AS AT DECEMBER 31, 2012 ($ thousands) MTS MSBA Trust Trust Account A Account B Account Account Total Total Pension obligations, Beginning of year $ 3,009,134 $ 2,942,963 $ 6,291 $ 247 $ 5,958,635 $ 5,737,670 Change in assumptions 33,178 36, ,083 7,760 Experience losses/(gains) 12,296 18, , ,054,608 2,997,739 6, ,059,073 5,745,668 Interest on accrued benefits 186, , , ,078 Benefits accrued 98,246 93, , ,213 Benefits paid (169,731) (166,696) (454) (35) (336,916) (328,324) Net increase (decrease) in pension obligations 114, , (18) 224, ,967 Pension obligations, End of year $ 3,169,470 $ 3,107,472 $ 6,600 $ 257 $ 6,283,799 $ 5,958,635 The accompanying notes are part of these financial statements. 52 TEACHERS RETIREMENT ALLOWANCES FUND

55 TEACHERS RETIREMENT ALLOWANCES FUND NOTES TO FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, ANNUAL REPORT 1. DESCRIPTION OF PLAN The Teachers Retirement Allowances Fund Board (the Board ) was originally constituted under an Act passed at the 1925 session of the Manitoba Legislature. The Board currently operates under the authority of The Teachers Pensions Act (the TPA ). The Board is charged with responsibility for administering the TPA and functions as trustee of a fund maintained to provide defined benefit pensions to public school teachers in Manitoba. The following description of the Teachers Retirement Allowances Fund (the Fund ) is a summary only. For more complete information, reference should be made to the TPA. (A) ACCOUNT STRUCTURE The TPA provides for two distinct and separate accounts in the Fund, known respectively as Account A and Account B. Account A receives member contributions and investment income associated with the investment assets held by Account A. Account A is responsible for the members share of the pension obligations as provided for in the TPA. Account A initially funds 100% of the pension payments to members and receives a monthly reimbursement from Account B for approximately 50% of such payments. Account A is responsible for all the administrative expenses of the Fund. As required by the TPA, separate sub-accounts are maintained within Account A for the Pension Adjustment Account (the PAA ) and Money Purchase Accounts held on behalf of eligible participants, Note 8 and Note 9. Account B is unfunded as it holds no assets. Account B is responsible for the Province of Manitoba s (the Province s ) share of the pension obligations as provided for in the TPA. Each month, Account B reimburses Account A for approximately 50% of the pension payments to members made in the prior month. The Fund maintains separate trust accounts for The Manitoba Teachers Society ( MTS ) and the Manitoba School Boards Association ( MSBA ). Qualifying employees of these organizations are considered to be teachers for purposes of participating in the Fund. Employer obligations for benefits, in respect of these individuals, are funded through these separate trust accounts, Note 10. The Fund also holds monies in trust and makes investments on behalf of the Province. These investments are commingled with investments made by the Fund. The Province of Manitoba Trust Account is shown as a liability on the Statement of Financial Position, Note 11. (B) FUNDING The TPA requires all members, except those receiving disability benefits in accordance with the TPA, to contribute to Account A on a basis related to their salary. Members currently contribute 7.3% on pensionable earnings up to the Canada Pension Plan s yearly maximum pensionable earnings ( YMPE ) and 8.9% on pensionable earnings in excess of the YMPE up to the maximum salary for which a defined benefit can be accrued under the Income Tax Act (Canada). These contribution rates will increase by 0.5% on September 1 of each year until At September 1, 2015 the contribution rate will be 8.8% on pensionable earnings up to the YMPE and 10.4% on pensionable earnings in excess of the YMPE up to the maximum salary for which a defined benefit can be accrued under the Income Tax Act (Canada). In accordance with the TPA, 83.3% of member contributions are used to fund basic benefits and 16.7% of member contributions are allocated to the PAA for the purpose of indexing benefits. Under the TPA, the amount allocated to the PAA is increased by 0.1% every five years until the percentage reaches 17%. The next scheduled increase will occur on September 1, In accordance with the TPA, the Province is not required to make contributions to Account B to pre-fund its share of the pension obligations. Accordingly, the Province s obligation for pension benefits, including cost of living adjustments, which is approximately $3.1 billion, is unfunded. However, the assets held in the Province of Manitoba Trust Account, which is approximately $1.8 billion, cannot be used for any purpose other than to fund the Province s obligations under the TPA and to pay the costs and expenses that are directly attributable to the administration of the trust account, Note 11 and Note 21. AUDITED FINANCIAL STATEMENTS 53

56 (C) RETIREMENT PENSIONS All members, regardless of the years of qualifying service, are eligible to receive an unreduced pension at age 65. Members with at least 10 years of qualifying service are also eligible to receive a pension as early as age 55. Although there is an early retirement reduction when a member retires before age 60 with combined age and service totaling less than 80, the member is entitled to an offsetting bridging benefit that is payable to the earlier of age 65 or death. Members who are at least age 55 but have fewer than 10 years of qualifying service are eligible for a reduced pension equal to the actuarial equivalent of the pension that would have been payable at age 65. All members must commence pension benefits no later than age 71. (D) REFUNDS Due to the lock-in provisions provided for in the TPA, refunds are generally not available when a member ceases to be an active member of the Fund. In most instances, the value of the pension must remain in the Fund until such time that the member is eligible for and elects to receive a pension. A refund is allowed if, as of the date the member ceases to be an active member of the Fund, the commuted value of the pension is below 20% of the YMPE or the annual pension payment is below 4% of the YMPE. (E) DEATH BENEFITS i. Active members Upon the death of an active member, a lump sum is payable to the estate or beneficiary based on the commuted value of the deferred pension. The commuted value of the portion of the death benefit related to the pre-1985 pension must be at least equal to the member s pre-1985 contributions plus interest. A spouse may elect to convert the lump sum benefit to a monthly annuity. ii. Retired members Upon the death of a member in receipt of a pension, pension benefits continue to be paid to a beneficiary where a guaranteed or survivor option has been selected. Where the contributions and interest accumulated at the pension effective date is greater than the pension paid out to the date of death, the excess is payable to the estate or beneficiary. (F) OTHER PROVISIONS i. Service purchases Purchase of past service and reinstatement of refunded service is allowed, pursuant to the terms and conditions contained in the TPA. ii. Relationship breakup Where a marriage or common-law relationship has ended in 1984 or later, the spouse/partner is entitled to one-half the value of the pension earned during the period of relationship, pursuant to the terms and conditions contained in the TPA. 54 TEACHERS RETIREMENT ALLOWANCES FUND

57 2012 ANNUAL REPORT iii. Teaching while receiving a pension A member who retires and returns to teach within 90 calendar days of retirement is deemed not to have retired. The member must repay any pension benefits received and resume contributing to the Fund. Following the 90-day provision noted above, a retired member can return to teach and continue to receive a pension provided that such member does not teach for more than 120 days in any school year. For the purposes of this provision, teaching more than 50% of a day is considered to be a full day. Effective as of the 121st day of teaching in any school year, the member s pension is suspended and the member must resume contributing to the Fund. A member who has at least 15 years of qualifying service is entitled to commence the pension the month following attaining age 65 without terminating the teaching contract. iv. Reciprocal transfer agreements The TPA authorizes the transfer of pensionable service in accordance with the terms of a reciprocal transfer agreement between the participating organizations. (G) COST OF LIVING ADJUSTMENTS Pensions are adjusted annually by the lesser of two-thirds of the change in the Canada Consumer Price Index (December over December), to a maximum of 5.33%, or the amount available in the PAA to fund one-half of the cost of living adjustment. Any surplus in the PAA that arises by virtue of the cost of living adjustment being limited to two-thirds of the change in the Canada Consumer Price Index shall be reserved until the end of 2017 and thereafter used only for determining pension adjustments in accordance with the regulations to the TPA. For 2018 and subsequent years, the limit on cost of living adjustments will be the lesser of the change in the Canada Consumer Price Index (not two-thirds thereof) and the amount actuarially available in the PAA to fund one-half of the cost of living adjustment. (H) INCOME TAXES The Fund is a Registered Pension Plan as defined in the Income Tax Act (Canada) and is not subject to Canadian income taxes. The Fund s registration number is AUDITED FINANCIAL STATEMENTS 55

58 2. SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION The Fund s financial statements are prepared in accordance with the Canadian accounting standards for pension plans. The Fund has also selected Part II (Accounting Standards for Private Enterprises) of the CICA Handbook for issues not directly addressed by these standards. (B) VALUATION OF INVESTMENTS Investments are stated at fair value. Fair value is the amount of consideration that would be agreed upon in an arm s length transaction between knowledgeable willing parties who are under no compulsion to act. The Fund maintains a written Valuation Handbook which sets out the general principles and methodologies for establishing fair value. The general provisions for establishing fair value for each type of asset are provided below. In instances where there is insufficient information to establish fair value, the investment is recorded at the lower of cost and the estimated net realizable value. i. Publicly traded equity investments Publicly traded equity investments, which are not otherwise restricted or thinly traded, are valued at year-end market prices as listed on the appropriate stock exchange as provided by the Fund s custodian. ii. Money market securities Money market securities are valued at cost which approximates fair value. iii. Bonds and debentures Bonds and debentures are valued at year-end market prices as provided by the Fund s custodian. iv. High yield debt High yield debt, according to the characteristics of the specific debt instruments, is valued at year-end market prices as provided by the Fund s custodian. v. Mortgages Mortgages are valued at the present value of future cash flows determined by an independent party. vi. Private investments Private investments are recorded at the estimated fair values determined by the external manager. Adjustments to the carrying value are made when there is evidence of a change in the value as indicated by an assessment of the investment s operational results, forecasts and/or other developments during the year. vii. Real estate investments Real estate investments are valued based on the most recent valuations or appraisals of the underlying properties net of any mortgage balances or other assets and liabilities associated with the investment. 56 TEACHERS RETIREMENT ALLOWANCES FUND

59 2012 ANNUAL REPORT viii. Infrastructure investments Infrastructure investments are recorded at the estimated fair values determined by the external manager. Adjustments to the carrying value are made when there is evidence of a change in the value as indicated by an assessment of the investment s operational results, forecasts and/or other developments during the year. ix. Pooled funds Pooled fund values are provided by the external manager and are generally based on the value of the underlying investments as determined herein. (C) USE OF ESTIMATES In preparing these financial statements, management must make estimates and assumptions that primarily affect the reported values of certain assets and liabilities at the date of the financial statements and the reported amounts of changes in net assets during the year. Actual results could differ from those estimates. (D) FOREIGN CURRENCY TRANSLATION The market value of investments and cash balances denominated in foreign currencies are translated into Canadian dollars at year-end exchange rates that are provided by the Fund s custodian. The resulting change is included in the current period change in fair value of investments. Transactions denominated in foreign currencies are translated into Canadian dollars at the rates of exchange prevailing on the dates of the transactions. Hedged foreign currency transactions are translated at rates of exchange established by the terms of the forward contracts. The foreign exchange on revenue and expense transactions is included in the net realized gain on the sale of investments, Note 15. (E) FORWARD CONTRACTS A forward contract is a contractual obligation to buy or sell a specified amount of foreign currency at a predetermined future date and exchange rate. Forward contracts are valued at the estimated amounts that the Fund would receive or pay to terminate the contracts at the reporting date, Note 7(A)iii. Realized and unrealized gains or losses on forward contracts are recognized with the current period change in fair value of investments. (F) PROVISION FOR FUND S SHARE OF EMPLOYEES PENSION BENEFITS Employees of the Fund are members of the pension plan established under The Civil Service Superannuation Act. The Fund accrues a liability for the employer s share of the employees pension benefits, including future cost of living adjustments, based on an actuarial report, Note 12. (G) COMPUTER AND OFFICE EQUIPMENT The cost of computer and office equipment is capitalized if it exceeds $1,000. Any such capitalized amounts are amortized over five years on a straight-line basis, Note 6. AUDITED FINANCIAL STATEMENTS 57

60 3. INVESTMENTS AT FAIR VALUE Account A assets are commingled for investment purposes with assets held in Money Purchase Accounts and the Trust Account assets held for MTS, MSBA and the Province. ($ thousands) Fixed Income Cash & Short-Term $ 88,785 $ 79,199 Public Bonds (Universe) 499, ,100 Public Bonds (Long) 400, ,701 Mortgages 401, ,365 High Yield Debt 261, ,832 Private Debt 3,500 3,500 1,656,572 1,698,697 Equity Canadian 747, ,587 United States 383, ,483 International 630, ,647 Private 418, ,349 2,179,996 1,988,066 Real Estate 770, ,939 Infrastructure 92,282 87,520 Total $ 4,699,241 $ 4,470,222 The Fund measures fair values using the following fair value hierarchy that reflects the significant inputs used in making the measurements: Level 1: Level 2: Level 3: Quoted market price (unadjusted) in an active market for an identical investment. Valuation techniques based on observable inputs, either directly or indirectly (ie. derived from prices). This category includes investments valued using: quoted market prices in active markets for similar investments; quoted prices for identical or similar investments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Valuation techniques using significant unobservable inputs. This category includes all investments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the investment s valuation. 58 TEACHERS RETIREMENT ALLOWANCES FUND

61 2012 ANNUAL REPORT The following table presents the fair values using the fair value hierarchy that reflects the significant inputs used in making the measurements. ($ thousands) 2012 Level 1 Level 2 Level 3 Total Fixed Income Cash & Short-Term $ $ 88,785 $ $ 88,785 Public Bonds (Universe) 499, ,985 Public Bonds (Long) 400, ,661 Mortgages 401, ,818 High Yield Debt 250,241 11, ,823 Private Debt 3,500 3,500 1,641,490 15,082 1,656,572 Equity Canadian 469, , ,334 United States 225, , ,481 International 163, , ,674 Private 418, , , , ,507 2,179,996 Real Estate¹ 770, ,391 Infrastructure¹ 92,282 92,282 $ 857,721 $ 2,545,258 $ 1,296,262 $ 4,699, % 54.16% 27.59% % 1 Real Estate and Infrastructure investments are held through financial instruments which include limited partnership units, participating bonds, shares and shareholder loans. The following table presents a reconciliation of investments measured at fair value using significant unobservable inputs (Level 3). ($ thousands) 2012 High Yield Private Private Real Debt Debt Equity Estate Infrastructure Total Balance, beginning of year $ 12,520 $ 3,500 $ 378,349 $ 695,939 $ 87,520 $ 1,177,828 Transfers in (out) Purchases 6,646 73, ,632 12, ,087 Sales (7,676) (56,202) (91,110) (12,558) (167,546) Gains/(losses) Realized 14 32,978 20, ,362 Unrealized 78 (9,628) 37,432 3,649 31,531 Balance, end of year $ 11,582 $ 3,500 $ 418,507 $ 770,391 $ 92,282 $ 1,296,262 AUDITED FINANCIAL STATEMENTS 59

62 The following table presents the prior year s fair values using the fair value hierarchy that reflects the significant inputs used in making the measurements. ($ thousands) 2011 Level 1 Level 2 Level 3 Total Fixed Income Cash & Short-Term $ $ 79,199 $ $ 79,199 Public Bonds (Universe) 550, ,100 Public Bonds (Long) 406, ,701 Mortgages 406, ,365 High Yield Debt 240,312 12, ,832 Private Debt 3,500 3,500 1,682,677 16,020 1,698,697 Equity Canadian 568, , ,587 United States 310,840 46, ,483 International 297, , ,647 Private 378, ,349 1,176, , ,349 1,988,066 Real Estate 1 695, ,939 Infrastructure 1 87,520 87,520 $ 1,176,560 $ 2,115,834 $ 1,177,828 $ 4,470, % 47.33% 26.35% % 1 Real Estate and Infrastructure investments are held through financial instruments which include limited partnership units, participating bonds, shares and shareholder loans. 4. INVESTMENTS GREATER THAN 1% Section 3.29 of the Pension Benefits Act Regulations requires disclosure of each investment asset that has a fair value greater than one percent of the fair value of all the investment assets of the Fund. The following schedule presents a listing of all investments in pooled funds or other vehicles that have a fair value greater than one percent of the fair value of all investment assets. ($ thousands) 2012 Greystone Mortgage Fund $ 401, % TDAM Emerald Long Bond Broad Market Pooled Fund 400, TDAM Emerald International Equity Index Fund 288, TDAM Emerald Canadian Equity Index Fund 278, TDAM Emerald US Equity Index Fund 107, DFA Emerging Markets Core Fund 99, Northleaf TRAF Private Equity Holdings I, L.P. 88, DFA International Small Cap Value Fund 78, Greystone Money Market Fund 52, DFA US Targeted Value Fund 50, Northleaf Global Private Equity Investors II (Canada), LP 50, TEACHERS RETIREMENT ALLOWANCES FUND

63 2012 ANNUAL REPORT 5. CONTRIBUTION AND OTHER RECEIVABLES ($ thousands) Member contribution receivables $ 6,309 $ 5,340 Other receivables Total $ 6,319 $ 5, COMPUTER AND OFFICE EQUIPMENT ($ thousands) Accumulated Accumulated Cost Amortization Net Cost Amortization Net Computer equipment $ 680 $ 537 $ 143 $ 572 $ 512 $ 60 Office equipment Total $ 1,085 $ 925 $ 160 $ 977 $ 882 $ RISK MANAGEMENT The Fund follows a diversified asset mix strategy designed to earn the required investment return at an acceptable level of risk. Some of the risks that the Fund is exposed to are as follows: (A) MARKET RISK Market risk consists of price risk, interest rate risk and foreign currency risk. i. Price risk Price risk is the risk that the value of an investment will fluctuate as a result of changes in market conditions, whether those changes are caused by factors specific to the individual investment, or factors affecting all securities traded in the market. To mitigate the impact of price risk, the Fund invests in a diversified portfolio of investments based on the Board approved Statement of Investment Policies and Procedures. ii. Interest rate risk Interest rate risk refers to the effect on the market value of assets and liabilities due to fluctuations in interest rates. The value of the Fund s fixed income assets is directly affected by changes in nominal and real interest rates. Pension liabilities are exposed to fluctuations in long-term interest rates as well as expectations in salary escalation. The fixed income portfolio has guidelines on concentration, duration, and distribution which are designed to partially mitigate the risks of interest rate volatility. Assuming a parallel change in the long and short-term yields, a 1% increase in interest rates would have the effect of decreasing the fair value of the Fund s fixed income investments by approximately 7.2% ( %). Conversely, a 1% decrease in interest rates would have the effect of increasing the fair value of the Fund s fixed income investments by approximately 7.2% ( %). AUDITED FINANCIAL STATEMENTS 61

64 iii. Foreign currency risk Foreign currency exposure results where investments are denominated in a foreign currency. Fluctuations in the relative value of foreign currencies against the Canadian dollar can result in a positive or negative effect on the fair value of investments. The Fund, either directly or through its investment managers, may employ hedging strategies to mitigate the foreign currency risk in the portfolio. At December 31, 2012, the Fund s high yield debt manager employed a hedging strategy in respect of securities denominated in a currency other than Canadian dollars. The high yield debt manager hedged the currency risk of US dollar denominated high yield bonds. The notional amount of forward contracts held by the Fund was $211,063,327 (2011 $190,987,225) with an unrealized loss of $1,630,771 (2011 unrealized gain $1,824,472). The Fund s foreign currency exposure reported in Canadian dollars, net of hedging and including indirect foreign currency exposure of public equity pooled funds, is presented below: ($ thousands) Currency Exposure Currency Exposure Canadian Dollar $ 3,367, % $ 3,268, % US Dollar 661, , Euro 186, , British Pound Sterling 129, , Japanese Yen 93, , Swiss Franc 42, , Australian Dollar 41, , Hong Kong Dollar 21, , South Korean Won 20, , Other 135, , $ 4,699, % $ 4,470, % The foreign currency exposure as a percentage of total investments is 28.34% ( %). A 10% increase in the value of the Canadian dollar in relation to all other foreign currencies, with all other variables held constant, would result in an unrealized investment loss of $133,182,000 (2011 $120,155,000). Conversely, a 10% decrease in the value of the Canadian dollar in relation to all other foreign currencies, with all other variables held constant, would result in an unrealized investment gain of $133,182,000 (2011 $120,155,000). 62 TEACHERS RETIREMENT ALLOWANCES FUND

65 2012 ANNUAL REPORT (B) CREDIT RISK Credit risk arises from the potential for an investee to fail or for a counterparty to default on its contractual obligations to the Fund. The Fund limits credit risk by dealing with counterparties that are considered to be of high quality relative to their obligations, by obtaining collateral where appropriate, through investment diversification and by setting and monitoring compliance with portfolio guidelines. With respect to individual corporate borrowers, the Fund has established investment policies which place limits on the exposure to any individual corporate entity. At December 31, 2012, the Fund s maximum credit risk exposure related to bonds and debentures, mortgages, high yield debt, short-term investments and cash totaling $1,656,572,000 (2011 $1,698,697,000), contributions receivable of $6,319,000 (2011 $5,354,000) and accrued investment income of $39,612,000 (2011 $28,213,000) totaling $1,702,503,000 (2011 $1,732,264,000). The breakdown of the fixed income investment portfolio by credit rating from various ratings agencies is presented below: ($ thousands) Credit Rating AAA $ 374, % $ 428, % AA 273, , A 251, , BBB 78, , Below BBB (including unrated) 188, , Subtotal 1,165, ,213, Cash and Short-Term 88, , Mortgages (unrated) 401, , Total $ 1,656, % $ 1,698, % All securities transactions are settled, upon delivery, by the Fund s custodian. The risk of default is considered minimal as delivery of securities sold is only made once the Fund s custodian has received payment. Payment is made on a purchase transaction once the securities have been received by the Fund s custodian. Credit risk associated with contributions receivable is minimal due to their nature. Contributions are deducted from members through the payroll process and remitted by the respective school divisions. With respect to the recovery of pensions paid, as provided for under the TPA, the Fund has authority to transfer such amounts from the employer trust accounts and Account B. No provision for doubtful contributions receivable has been recorded in either 2011 or AUDITED FINANCIAL STATEMENTS 63

66 (C) LIQUIDITY RISK Liquidity risk is the risk of being unable to generate sufficient cash, or its equivalent, in a timely and cost-effective manner to meet commitments as they come due. The Fund is exposed to liquidity risk through its responsibility to pay benefits as required under the TPA and fund its outstanding investment commitments as described in Note 17. The Fund mitigates liquidity risk by maintaining sufficient cash balances, by holding various income producing assets and limiting exposure to non-liquid asset classes. The term to maturity and the related market values of fixed income investment portfolio is presented below: ($ thousands) Term to Maturity Less than one year $ 195, % $ 198, % One to five years 520, , Over five years 939, ,011, Total $ 1,656, % $ 1,698, % The Fund holds the above fixed income investments both directly and indirectly through pooled funds. (D) SECURITIES LENDING The Fund has entered into a securities lending program through CIBC Mellon Global Securities Services and CIBC Bank (the lending agent). Under the program, the Fund will lend various securities in its possession to borrowers approved by the lending agent. The loans can be secured by either securities or cash collateral. The Fund has various risks under this program including borrower default and reinvestment risk. Borrower default occurs if the borrower fails to return the loaned securities. Borrower default risk is mitigated by joint and several indemnities provided by CIBC Mellon, CIBC Bank and Bank of New York Mellon. Borrower default risk is also mitigated by requiring the borrowers to provide collateral with an aggregate market value exceeding the aggregate market value of the loaned securities. Reinvestment risk occurs if the interest earned on any cash collateral is insufficient to cover the interest that is rebated to the borrower. Reinvestment risk is mitigated by the relatively short duration of the investment of the collateral and the short duration of the loans, the majority of which are done on an open or overnight basis. 8. PENSION ADJUSTMENT ACCOUNT A separate sub-account known as the PAA has been established within Account A in accordance with the TPA. The PAA is currently allocated 16.7% of all member contributions. The PAA is also credited with net investment income based on the formula prescribed by the TPA. ($ thousands) Balance at beginning of year $ 201,903 $ 186,658 Contributions 13,436 12,280 Net investment income 20,261 19,583 Benefits paid (17,582) (16,618) Balance at end of year $ 218,018 $ 201, TEACHERS RETIREMENT ALLOWANCES FUND

67 2012 ANNUAL REPORT 9. MONEY PURCHASE ACCOUNTS Separate Money Purchase Accounts have been established for persons transferring money to the Fund in accordance with the TPA. These accounts are maintained separately from the Fund s other activities. The accounts earn the same rate of return as the total Fund. ($ thousands) Balance at beginning of year $ 4,046 $ 2,717 Transfers in 518 1,471 Net investment income, Note Change in fair value on investments, Note (16) Transfers out (215) (264) Balance at end of year $ 4,734 $ 4, EMPLOYER TRUST ACCOUNTS The Fund maintains separate trust accounts for the employer obligation for pension benefits in respect of MTS and MSBA employees who are members of the Fund. The trust accounts receive the employer contributions and investment income and are charged with the employer share of pensions paid. (A) THE MANITOBA TEACHERS SOCIETY TRUST ACCOUNT ($ thousands) Balance at beginning of year $ 6,082 $ 6,037 Contributions Net investment income, Note Change in fair value on investments, Note (22) Benefits paid (439) (392) Balance at end of year $ 6,362 $ 6,082 (B) MANITOBA SCHOOL BOARDS ASSOCIATION TRUST ACCOUNT ($ thousands) Balance at beginning of year $ 187 $ 215 Contributions Net investment income, Note Change in fair value on investments, Note 15 9 (1) Benefits paid (34) (34) Balance at end of year $ 168 $ 187 AUDITED FINANCIAL STATEMENTS 65

68 11. PROVINCE OF MANITOBA TRUST ACCOUNT Under terms of an agreement between the Province and the Board (the Trust Agreement ), the Province established a trust account with the Board in 2001 and is making the required payments to the trust account. The Province has also made additional payments to the trust account. While the monies in the trust account are not Fund assets and are accounted for separately by the Fund, the Trust Agreement was amended effective December 31, 2008, to make the trust irrevocable. Accordingly, the assets in the trust account cannot be used for any purpose other than to fund the Province s liabilities under the TPA and to pay the costs and expenses that are directly attributable to the administration of the trust account. According to the terms of the agreement, the trust account earns a contracted rate of return of the Fund and the Fund is paid a fee for its investment management services. Accordingly, the trust account is credited with its pro-rata portion of net investment income as defined in the Trust Agreement, Note 14, and change in fair value of investments, Note 15. The payments made by the Province to the trust account do not reduce its pension obligations to the Fund. ($ thousands) Balance at beginning of year $ 1,721,277 $ 1,752,886 Deposits 77,355 72,754 Net investment income, Note 14 59,103 59,057 Change in fair value on investments, Note 15 89,729 (7,233) Transfers to Account B (161,386) (156,187) Balance at end of year $ 1,786,078 $ 1,721, PROVISION FOR FUND S SHARE OF EMPLOYEES PENSION BENEFITS Employees of the Fund are members of the pension plan established under The Civil Service Superannuation Act. The Fund accrues a liability for the employer s share of the employees pension benefits, including future cost of living adjustments, based on an actuarial report. ($ thousands) Balance at beginning of year $ 4,489 $ 3,886 Change in assumptions/experience ,524 4,145 Benefits accrued Interest accrued on benefits Benefits paid (101) (94) Balance at end of year $ 4,892 $ 4,489 The valuation of the pension obligations as at December 31, 2011 was conducted by Ellement & Ellement Ltd., consulting actuaries. The key actuarial assumptions were a rate of return of 6.00% ( %), a rate of inflation of 2.00% ( %), general salary rate increases of 2.75% ( %) and post-retirement indexing at one-third of the inflation rate. The accrued benefit cost method with salary projection was used. The pension obligation has been extrapolated to December 31, 2012 using a formula provided by Ellement & Ellement Ltd. 66 TEACHERS RETIREMENT ALLOWANCES FUND

69 2012 ANNUAL REPORT 13. OTHER CONTRIBUTIONS ($ thousands) Statutory obligations of the Province $ 1,624 $ 1,622 Transfers under reciprocal agreements 1,170 1,379 Transfers from MTS and MSBA Trust Accounts Transfers from Money Purchase Accounts Total $ 3,268 $ 3, INVESTMENT INCOME ($ thousands) Fixed Income Cash & Short-Term $ 1,075 $ 498 Public Bonds (Universe) 17,764 19,870 Public Bonds (Long) 26,668 26,231 Mortgages 18,175 17,944 High Yield Debt 16,100 19,985 Private Debt Equity Canadian 21,593 17,959 United States 11,056 6,411 International 19,856 20,116 Private 9,386 8,858 Real Estate 30,056 28,267 Infrastructure 1,747 6,105 Securities lending Gross investment income 174, ,120 Less: Expenses, Note 18 (13,489) (13,810) Allocation to Money Purchase Accounts, Note 9 (160) (138) Allocation to Employer Trust Accounts, Note 10 (228) (208) Allocation to Province of Manitoba Trust Account, Note 11 (59,103) (59,057) Net investment income $ 101,550 $ 99,907 AUDITED FINANCIAL STATEMENTS 67

70 15. CURRENT PERIOD CHANGE IN FAIR VALUE OF INVESTMENTS ($ thousands) Net realized gains/(losses) on the sale of investments $ 78,209 $ 71,877 Net unrealized market gains/(losses) 166,017 (91,343) Current period change in fair value of investments $ 244,226 $ (19,466) Less: Allocation to Money Purchase Accounts, Note 9 (225) 16 Allocation to Employer Trust Accounts, Note 10 (321) 23 Allocation to Province of Manitoba Trust Account, Note 11 (89,729) 7,233 Total $ 153,951 $ (12,194) 16. RELATED PARTY TRANSACTIONS (A) INVESTMENTS WITH THE PROVINCE OF MANITOBA The Fund is related to the Province and is also related to Greystone Managed Investments Inc. (see Note 16(B) below). The Fund has engaged Greystone Managed Investments Inc. to manage certain fixed income assets on its behalf and, under this mandate, Greystone Managed Investments Inc. may trade in bonds issued by the Province on behalf of the Fund. A summary of such activities for the year are set out below ($ thousands) Bonds Short-Term Total Total Balance at beginning of year $ 18,893 $ $ 18,893 $ 4,705 Purchases 20,204 20,204 64,620 Sales (19,689) (19,689) (54,887) Change in fair value (3,309) (3,309) 4,455 Balance at end of year $ 16,099 $ $ 16,099 $ 18,893 Interest income $ 539 $ $ 539 $ 329 (B) INVESTMENT MANAGEMENT SERVICES The Fund owns approximately 10.5% of the issued shares of Greystone Capital Management Inc., whose subsidiary Greystone Managed Investments Inc. provides certain investment management services to the Fund on a fee-for-service basis. The fees paid by the Fund to Greystone Managed Investments Inc. for the year were $4,121,455 (2011 $4,682,213). 68 TEACHERS RETIREMENT ALLOWANCES FUND

71 2012 ANNUAL REPORT 17. COMMITMENTS Certain of the Fund s investments are made on the basis of an initial commitment of a defined dollar amount, which amount is then called for and advanced by the Fund in future years. The typical period over which such amounts may be called is five years from the date of commitment. As at December 31, 2012, the Fund had outstanding commitments for private equity and infrastructure investments as follows: ($ thousands) Private Equity $ 255,472 $ 316,796 Infrastructure 39,448 52,197 Total $ 294,920 $ 368,993 Of the amount outstanding as at December 31, 2012, $150,884,000 (2011 $198,778,000) is related to commitments denominated in US dollars and therefore the amount in Canadian dollar terms may increase or decrease depending on the Canadian to US dollar exchange rate at the time the funds are drawn. 18. ADMINISTRATIVE AND INVESTMENT EXPENSES ($ thousands) Administrative Investment Administrative Investment Expenses Expenses Total Expenses Expenses Total Salaries and benefits $ 2,598 $ 829 $ 3,427 $ 2,741 $ 730 $ 3,471 Office and administration Actuarial Audit Custody and banking Communications Travel Professional fees Board and committees Portfolio oversight Subtotal 3,838 2,110 5,948 3,797 1,661 5,458 Investment management fees 11,379 11,379 12,149 12,149 Total $ 3,838 $ 13,489 $ 17,327 $ 3,797 $ 13,810 $ 17,607 AUDITED FINANCIAL STATEMENTS 69

72 19. REMUNERATION AND COMPENSATION (A) BOARD AND COMMITTEE MEMBER REMUNERATION Board members are appointed by the Lieutenant Governor in Council and are paid a set fee for attendance at Board and committee meetings. Board members, other than the Chair, are also entitled to a fixed fee for each day spent on Fund business or at an approved conference or training event. The current rate is $200 per day or part day. The Board Chair, who also acts as Chair of the Investment Committee, receives a fixed amount per month. In addition to Board members, the Investment Committee and the Audit Committee have external members appointed by the Board. The remuneration of such external members is set by the Board. In addition, the TPA appoints the Deputy Minister of Finance (or designate) as a member of the Investment Committee without remuneration. The following table presents the Board and Committee member remuneration for 2011 and Payments are generally issued to the Board or Committee member. However, upon the request of the Board or Committee member, payments may be directed to their employer. Name Position(s) Mal Anderson Board Chair, Investment Committee Chair $ 20,000 $ 15,333 Henry Shyka Board Vice Chair, Investment Committee Member 2,800 2,600 Ray Desrochers Board Member, Audit Committee Chair 4,000 2,200 Richard Alarie Board Member, Investment Committee Observer 4,600 2,600 Madeline McKenzie Board Member 2,600 Heather Grant-Jury Board Member, Audit Committee Member 2,400 Norm Gould Board Member 2,800 John Ehinger Board Member 600 1,400 Pat Isaak Board Vice Chair, Investment Committee Member 1,600 Glen Anderson Board Member, Investment Committee Observer 1,600 Terry Clifford Board Member 400 3,400 Lucy Vogrig Board Member, Audit Committee Member 400 3,200 Gary Gibson Investment Committee Member n/a n/a Sam Pellettieri Investment Committee Member 6,000 4,000 David Stangeland Investment Committee Member 6,000 4,000 Keith Findlay Audit Committee Member 4,000 4,000 Total $ 56,600 $ 45, TEACHERS RETIREMENT ALLOWANCES FUND

73 2012 ANNUAL REPORT (B) COMPENSATION The following table presents the base salary and bonuses paid to senior management for the previous three years. Name and Principal Position(s) Year Salary Bonus Total Jeff Norton 2012 $ 313,955 $ 50,000 $ 363,955 President & CEO ,005 50, ,005 Chief Investment Officer ,088 50, ,088 Brenda Venuto 2012 $ 137,396 $ n/a $ 137,396 Vice President, Member Services ,702 n/a 134, ,061 n/a 132,061 Les Brown 2012 $ 137,396 $ n/a $ 137,396 Vice President, Information Services ,702 n/a 134, ,061 n/a 132,061 David Asselstine 2012 $ 131,021 $ n/a $ 131,021 Vice President, Finance ,726 n/a 114,726 Chief Risk Officer ,980 n/a 106,980 In addition to the cash compensation disclosed above, each employee of the Fund, including members of senior management, is entitled to other employment benefits including, without limitation, participation in the defined benefit pension plan for Manitoba Civil Service employees, health care, dental coverage, vision coverage, health spending account in the amount of $350, group life insurance, long-term disability insurance, participation in an employee assistance program and professional memberships as applicable. Members of senior management are also provided with parking privileges. AUDITED FINANCIAL STATEMENTS 71

74 20. ACTUARIAL VALUATIONS (A) BASIC BENEFITS The TPA requires that an actuarial valuation of the Fund be prepared at least every three years. The most recent actuarial valuation of the Fund was completed as at January 1, 2012 by Aon Hewitt, consulting actuaries. This is a funding valuation which projects the plan s future benefit costs and compares them to the Fund s assets plus future contributions. The previous valuation occurred as at January 1, The projected unit credit actuarial cost method was used for each valuation. The assumptions used in determining the actuarial value of benefits accrued for service to date for the Fund were developed by reference to expected long-term market conditions. The significant long-term actuarial assumptions used in the valuations were: January 1, 2012 January 1, 2009 Annual rate of return (a) Inflation component 2.00% 2.25% (b) Real rate of return 4.25% 4.00% 6.25% 6.25% Annual salary escalation rates (a) General increases: (i) inflation component 2.00% 2.25% (ii) productivity component 1.00% 0.75% (b) The rates used for seniority, merit and promotional increases are related to the number of years of service and range from 0.50 to 5.50%. These rates ranged from 0.50 to 5.50% in the 2009 valuation. 72 TEACHERS RETIREMENT ALLOWANCES FUND

75 2012 ANNUAL REPORT i. Account A and Account B The actuarial valuation of Account A (excluding the Pension Adjustment Account) as at January 1, 2012 disclosed actuarial assets of $3,412,578,000 and actuarial liabilities of $3,719,684,000, resulting in a deficit of $307,106,000 (2009 deficit of $391,406,000). The details of the January 1, 2012 actuarial valuation are as follows: ($ thousands) Accrued Future Total Assets $ 2,613,778 $ 798,800 $ 3,412,578 Liabilities 2,844, ,337 3,719,684 Surplus/(Deficit) $ (230,569) $ (76,537) $ (307,106) The deficit means that Account A is not sufficiently funded to cover the cost of the projected future benefits. The next valuation of the Fund will occur no later than January 1, Pension liabilities are exposed to the long-term expectation of real rate of return on the investments as well as expectations of inflation and salary escalation. Holding all other actuarial assumptions in the January 1, 2012 valuation constant, a 1% decrease in the long-term rate of return assumption would result in an increase of the Fund s pension obligations of approximately 13.94% (or 17.79% for accrued and future liabilities). Conversely, a 1% increase in the long-term rate of return assumption would result in a decrease of the Fund s pension obligations of approximately 13.94% (or 17.79% for accrued and future liabilities). The actuarial valuation of Account B (excluding cost of living adjustments) as at January 1, 2012 disclosed no actuarial assets and actuarial liabilities of $2,787,478,000 (2009 $2,459,145,000). The 2012 Account B valuation did not include any future service expected to be rendered by the members of the plan on January 1, ii. MTS Trust Account The actuarial valuation of the MTS Trust Account as at January 1, 2012 disclosed actuarial assets of $6,082,000 and pension obligations of $6,451,000, resulting in a deficit of $369,000 (2009 deficit of $449,000). iii. MSBA Trust Account The actuarial valuation of the MSBA Trust Account as at January 1, 2012 disclosed actuarial assets of $187,000 and pension obligations of $275,000 resulting in a deficit of $88,000 (2009 deficit of $58,000). (B) PENSION ADJUSTMENTS (COST OF LIVING) The TPA requires that the PAA be actuarially valued each year to determine the amount available to fund one-half of any cost of living increase. On February 14, 2013, Aon Hewitt issued its valuation of the PAA as at December 31, The surplus amount was calculated as $17,138,000 after the determination of experience gains and losses and the change of certain assumptions. The assumption regarding the rate of interest to be earned on the PAA was 3.75% ( %). Based on this report, the Board approved the payment of a 0.55% cost of living adjustment effective July 1, 2013, which reduced the surplus in the PAA by $12,378,000 to $4,760,000. The surplus arose by virtue of the cost of living adjustment being limited to two-thirds of the change in the Canada Consumer Price Index (December over December). As a result, $4,760,000 shall be held in reserve until the end of 2017 and thereafter used only for determining pension adjustments in accordance with the regulations to the TPA (see Note 1(G)). AUDITED FINANCIAL STATEMENTS 73

76 21. PENSION OBLIGATIONS (A) BASIC BENEFITS (EXCLUDING PENSION ADJUSTMENTS) The present value of pension obligations for Account A and Account B (excluding pension adjustments which are shown in Note 21(B) below), for service to January 1, 2012, was determined from the actuarial valuation referred to in Note 20. The liability for future service expected to be rendered after the valuation date is excluded. The present value of pension obligations has been extrapolated from January 1, 2012 to December 31, 2012, using a formula developed by the actuary. Under the formula, the cost of benefits accrued under Account A is estimated to be 122.4% of the amount of corresponding member contributions plus any funds transferred to Account A as a result of reciprocal transfers or the conversion of Money Purchase Accounts to annuities. Account A Account B ($ thousands) Basic Benefits Basic Benefits Total Total Estimated actuarial present value of pension obligations for service to beginning of year $ 2,807,364 $ 2,741,193 $ 5,548,557 $ 5,358,334 Change in assumptions 24,820 28,389 53,209 Experience losses/(gains) 12,163 17,896 30,059 2,844,347 2,787,478 5,631,825 5,358,334 Interest accrued on benefits 177, , , ,896 Benefits accrued 85,868 81, , ,228 Benefits paid (151,775) (148,740) (300,515) (293,901) Net increase in pension obligations 111, , , ,223 Estimated actuarial present value of pension obligations for service to end of year $ 2,956,212 $ 2,894,214 $ 5,850,426 $ 5,548,557 Given that the net assets available for basic benefits held in Account A as at December 31, 2012 was $2,740,939,000, there is an estimated deficit in Account A for pension obligations of approximately $215,273,000 (2011 deficit $220,661,000). This estimate assumes no experience gains or losses and the same assumptions used in the January 1, 2012 valuation. Since the Account B liability for basic benefits is unfunded and had a liability owing to Account B of $14,545,000 (2011 $14,552,000), there is an estimated deficit in Account B for pension obligations of approximately $2,908,759,000 (2011 deficit $2,755,745,000). While Account B has no assets, it is supported by the assets held in the Province of Manitoba Trust Account (see Note 11). 74 TEACHERS RETIREMENT ALLOWANCES FUND

77 2012 ANNUAL REPORT (B) PENSION ADJUSTMENTS (COST OF LIVING) The present value of accrued pension adjustments for the PAA is based on the February 14, 2013 actuarial report referred to in Note 20(B). The present value of accrued cost of living benefits for Account B has been extrapolated on the same basis as the PAA. Account A Account B Sub-Account Sub-Account ($ thousands) PAA Cost of Living Total Total Estimated actuarial present value of accrued pension adjustments at beginning of year $ 201,770 $ 201,770 $ 403,540 $ 372,972 Change in assumptions 8,358 8,358 16,716 7,760 Experience losses/(gains) , , , ,970 Interest accrued on benefits 8,575 8,575 17,150 16,784 Benefits accrued 12,378 12,378 24,756 39,770 Benefits paid (17,956) (17,956) (35,912) (33,984) Net change in accrued pension adjustments 2,997 2,997 5,994 22,570 Estimated actuarial present value of accrued pension adjustments at end of year $ 213,258 $ 213,258 $ 426,516 $ 403,540 Given that the net assets available in the PAA sub-account as at December 31, 2012 was $218,018,000, there is an estimated actuarial surplus in the PAA of approximately $4,760,000 (2011 surplus $133,000). The current year s surplus arose by virtue of the cost of living adjustment being limited to two-thirds of the change in the Canada Consumer Price Index (December over December). As a result, $4,760,000 shall be held in reserve until the end of 2017 and thereafter used only for determining pension adjustments in accordance with the regulations to the TPA (see Note 1(G)). While the Account B liability for accrued pension adjustments is unfunded, it is supported by the assets held in the Province of Manitoba Trust Account (see Note 11). AUDITED FINANCIAL STATEMENTS 75

78 (C) COMBINED (BASIC BENEFITS AND PENSION ADJUSTMENTS) The extrapolated value of pension obligations for Account A and Account B including pension adjustments as at December 31, 2012 is presented below ($ thousands) Account A Account B Total Total Estimated actuarial present value of pension obligations for service to beginning of year $ 3,009,134 $ 2,942,963 $ 5,952,097 $ 5,731,306 Change in assumptions 33,178 36,747 69,925 7,760 Experience losses/(gains) 12,296 18,029 30, ,054,608 2,997,739 6,052,347 5,739,304 Interest accrued on benefits 186, , , ,680 Benefits accrued 98,246 93, , ,998 Benefits paid (169,731) (166,696) (336,427) (327,885) Net change in accrued pension adjustments 114, , , ,793 Estimated actuarial present value of pension obligations for service to end of year $ 3,169,470 $ 3,107,472 $ 6,276,942 $ 5,952, CAPITAL DISCLOSURES In the context of the Fund, capital is defined as the net assets available for benefits. Externally imposed capital requirements relate to the administration of the Fund in accordance with the applicable terms of the TPA, The Pension Benefits Act (Manitoba) and the Income Tax Act (Canada). The Fund has developed risk management strategies, as described in Note 7, to manage the net assets available for benefits. The Fund complied with the applicable externally imposed capital requirements during the year. Capital management strategies did not change during the year. 23. COMPARATIVE FIGURES Certain of the prior year s figures have been reclassified to conform to the current year s presentation. 76 TEACHERS RETIREMENT ALLOWANCES FUND

79 Directory 2012 ANNUAL REPORT BOARD Mal Anderson, Chair Henry Shyka, Vice Chair Ray Desrochers Richard Alarie Heather Grant-Jury Madeline McKenzie Norm Gould INVESTMENT COMMITTEE Mal Anderson, Chair Gary Gibson, Provincial Representative Henry Shyka, Teacher Representative Richard Alarie, Teacher Observer (non-voting) David Stangeland, External Member (non-voting) Sam Pellettieri, External Member (non-voting) AUDIT COMMITTEE Ray Desrochers, Chair Heather Grant-Jury Keith Findlay, External Member MANAGEMENT Jeff Norton, President & CEO/Chief Investment Officer Brenda Venuto, Vice President, Member Services Les Brown, Vice President, Information Services David Asselstine, Vice President, Finance/Chief Risk Officer PRIVACY OFFICER Jeff Norton ACTUARY Aon Hewitt AUDITOR Office of the Auditor General of Manitoba CUSTODIAN CIBC Mellon Global Securities Services PERFORMANCE MEASUREMENT BNY Mellon Asset Servicing JEFF NORTON DAVID ASSELSTINE BRENDA VENUTO LES BROWN TRAF is subject to The Freedom of Information and Protection of Privacy Act (FIPPA). As such, certain of our records are available to the public on request, subject to compliance with certain procedures set out in, and payment of any applicable fees prescribed by, FIPPA. DIRECTORY 77