2011 Annual Report. Teachers Pension Plan

Transcription

1 2011 Annual Report Highlights Teachers Pension Plan

2 Highlights Fund Results For the year ended August 31, 2011, the fund returned 7.8% exceeding the fund s benchmark of 7.3% by 0.5% Over the 19-year period since the current benefit and funding structure was adopted by the plan sponsors, the Teachers Pension Plan has on average earned 6.9% each year, exceeding the plan s funding rate-of-return objective of 6.6% by 0.3% each year Table of Contents Financial Highlights 3 Report of the Board Chair 4 Report of the Chief Executive Officer 6 Plan Member Services 8 Surveys Deliver High Marks 9 Plan Liability, Funding and Investment Structure 10 Investment Performance 13 ATRF Profile 14 Management 14 Key Accomplishments 2010/11 Successfully commenced the implementation plans related to the new policy asset mix relating to infrastructure, private equity, real estate and global equity asset classes Met or exceeded all service turnaround benchmarks for our services to plan members Implemented further enhancements to On-Line Services, website and print communication Received high approval ratings from the results of plan member surveys Recognized as having one of the lowest plan member service costs in the industry at $69 per member Completed the first annual testing of the operational effectiveness of internal controls over financial reporting and based on the results, the Chief Executive Officer and Director, Financial Services certified that internal control over financial reporting, and disclosure controls and procedures are properly designed and operating effectively Go to to view the 2011 Annual Report. 1

3 Change in Net Assets of the Teachers Pension Plan Even though the global investment markets were volatile, the fiscal year was positive with a yearover-year increase in fund assets of $795 million (an increase of 14.4%) leaving the fiscal year-end value at $6.303 billion. Investment earnings of $438 million and $357 million of positive net cash flows from contributions above benefit payments and expenses, accounted for this change. Net Plan Assets ($ Billions) Asset Mix at August 31, % Return Enhancing Global Equity 40.0% Canadian Equity 17.5% Private Equity 4.0% 35.5% Liability Matching Universe Bonds 22.0% Long-Term Bonds 11.5% Money Market 2.0% 3.0% Inflation Sensitive Real Estate 1.0% Infrastructure 2.0% Teachers' Pension Plan Post-1992 Period Funding Liabilities Funding Value of Assets Funding Deficiency at August 31, 2011 ($ Billions) 2

4 Teachers Pension Plan Financial HIGHLIGHTS NET ASSETS AVAILABLE FOR BENEFITS AT AUGUST 31, 2011 $ Thousands Investments Equities $ 3,987,879 $ 3,489,286 Bonds and debentures 2,183,023 1,795,692 Money-market securities 114, ,061 6,285,294 5,474,039 Cash 1,548 3,655 Contributions Receivable 11,895 11,265 Other Assets and Liabilities 4,291 19,099 Net Assets Available for Benefits $ 6,303,028 $ 5,508,058 FUNDING ACTUARIAL DEFFICIENCY AT AUGUST 31, 2011 $ Thousands Funding Liabilities $ 8,568,000 $ 7,739,000 Funding Value Assets 1 6,817,000 5,952,000 Funding Deficiency $ (1,751,000) $ (1,787,000) 1 The Plan uses an actuarially accepted practice of smoothing market returns over a five-year period to moderate short-term adjustments to contribution rates. This practice is intended to even out the impact from the volatility of market returns on the plan s funded status. As at August 31, 2011, the plan s funding value of net assets available was $514 million higher than the fair value of net assets available ( $444 million higher). 3

5 Report of the Board CHAIR Greg Meeker All pension plans, including the pension plan for Alberta teachers, continue to face funding challenges to secure the pensions promised under the plans. Generally, pension plans are designed such that investment returns provide for about 75% to 80% of the funding of pension plan benefits. However, the extremely low interest rate environment suggests that pension plans, and all savers, will earn lower returns for the foreseeable future as compared to the higher returns experienced in the 25 years prior to September 2000 during which ATRF s fund earned an average of 9.8% each year. Returns from higher-risk and higherreturn assets such as equities have been subjected to negative market extremes over the past 11 years, starting with the burst of the technology-stock bubble in 2000, followed by the financial crisis, to the current sovereigndebt crisis of the developed world economies. Pension plans have incurred funding deficiencies and the cost of future benefits has increased. Consequently, plan funding contributions have risen and will rise further. Good pension plans, like the plan for the teachers of Alberta that also provides for ancillary benefits such as cost-of-living adjustments and generous early retirement benefits, are expensive and are getting more expensive in part due to lower investment returns, but also because people are living longer. It is important to note that the benefits under the plan are set by the plan sponsors, namely The Alberta Teachers Association and the Government of Alberta. The ATRF Board s responsibility is to ensure that these benefits are funded within the rules set by legislation. Since the Board cannot influence the rates of return that will arise from the investment markets and does not set plan benefits, the Board has only one lever available when funding losses arise, and that is to raise contribution rates as it is required to do by legislation. 4

6 Funding Review The changing world economy, low growth in the developed world, and ongoing consumer and government deleveraging make for greater uncertainty in investment returns with potential for ongoing high volatility. Consequently, the current margin for adverse plan experience in the plan s funding policy needs to be reassessed and may be increased to provide for additional reserves to enhance protection against uncertainty and to mitigate the transfer of liability for benefits being earned today to future generations. The Board is undertaking a comprehensive review of plan funding that will examine the sustainability of the existing funding policy, and provide information for discussion with the plan sponsors, the Government of Alberta and The Alberta Teachers Association, in The funding review will consider the current funded status of the plan and funding will be stress tested under alternative funding assumptions. We anticipate that, by mid-2012, we will be in a position to provide information on the revised funding policy to all plan stakeholders and to set the required contribution rates effective for September This review will provide the Board with the information to set a revised funding policy to ensure that the pension plan for Alberta teachers remains sustainable for the foreseeable future and continues to secure the pension promise. the Board From left to right: Harry Buddle, Lowell Epp, Karen Elgert, Greg Meeker, Sharon Vogrinetz, Gene Williams. 5

7 Report of the Chief Executive Officer Emilian Groch The world s overall investment markets have provided weak investment returns over the past 11 years due to several financial and economic shocks. While there has been a modest recovery from the financial crisis, economic and debt concerns continue in a number of countries in the developed world. Growth in these markets has been low with Europe struggling with the sovereign debt and banking crisis; and, the United States grappling with high debt, very low levels of job growth and a depressed housing market. The ATRF fund had a strong positive return of 7.8% in the fiscal year, exceeding the fund s benchmark by 0.5% and meeting the funding rateof-return objective of the plan for this one-year period. However, due to very poor returns from the world s equity markets over the past 11 years, the fund of the Teachers Pension Plan has returned on average only 3.5% each year, which is 3.4% per year short of the targeted funding rate-of-return objective. Consequently, substantial funding shortfalls have arisen over the past 11 years. The Teachers Pension Plan has a funding deficiency of $1.751 billion as at August 31, Under legislation, this funding deficiency must be covered by additional contributions over a maximum period of 15 years. The additional contribution rates to amortize the deficiency and bring the plan to a fully funded position are significant and will increase further as investment losses deferred from the financial crisis are fully recognized over the next three years. Implementation of New Target Policy Asset Mix Based on a comprehensive reassessment of the funding, liability and investment structures of the plan in the fiscal year, the Board approved a new long-term target policy asset mix that includes new or increased allocations to nonpublicly traded assets including real estate, infrastructure and private equity. Following the completion of implementation planning for this new target policy asset mix in the fiscal year, we commenced the implementation of the new policy asset mix in the past fiscal year. 6

8 Historically, the biggest challenge to success in these non-publicly traded asset classes for many investors has been the high cost associated with funds and fund-of-funds in the form of manager fees and carried interest. The growth in the assets of the fund, and the significant total allocation of 35% of fund assets to these asset classes, will give ATRF the scale to reduce, but not eliminate its reliance on high-cost external providers. Our investment into these asset classes will take considerable time to fully implement, and our approach is to manage these asset classes by building internal capability and leveraging strategic partnerships to source funds and to co-invest with like-minded investors. In the fiscal year, we commenced the implementation of the long-term vision, strategy, process and resource requirements involved in building and maintaining a successful, cost-effective investment program for non-publicly traded asset classes. Our investment staff has now doubled in size over the past two years, providing the required human resources to support our ongoing growth in assets and successfully implement our investment plans in non-publicly traded assets. ATRF has become an increasingly active and sophisticated investor in illiquid asset classes such as private equity, infrastructure and real estate. Enhancements to Plan Member Services We continue to focus on quality and cost-effective services that meet the needs of the plan members. We have improved customer service and operational efficiency through best-practice reviews, and the identification and implementation of enhancements to our customer service processes and communication activities. These quality plan member services are being provided in a very cost-effective manner. The cost of providing services to plan members in the fiscal year was $69 per member, less than one-half of the average cost of $155 per member for the group of major Canadian public sector pension organizations that benchmark cost and service levels. The results of our bi-annual plan member survey in 2011 revealed that 95% of survey respondents rated our overall service as good to excellent. Our ongoing survey of new pensioners showed that 98% of survey respondents rated service and communication during their pension application process as good to excellent. We will continue to make cost-effective enhancements to plan member services and communication. 7

9 Plan Member Services Exceed Benchmarks ATRF has a dedicated and knowledgeable team of employees providing services in a cost-effective manner to active teachers, pensioners, inactive teachers, beneficiaries, and their representatives. We have established benchmarks for the delivery of services and each year measure our benefit delivery against those benchmarks. The following table shows our service turnaround benchmarks for key processes and our results for the fiscal year, with comparisons for the fiscal year. We exceeded the benchmark in all processes and improved our average elapsed time in three of the nine processes. Average Average Service Elapsed Time Elapsed Time Provided Benchmark Ongoing pensioner payments On the third last All payments All payments business day made on time made on time of the month Pension options package for new pensioner Within 10 days of application 3 days 4 days Pension payment for new pensioner Within 7 days 3 days 3 days Pension estimate Within 7 days 1 day 1 day Purchase estimate Within 10 days 2 days 2 days Termination benefit Within 10 days 3 days 2 days Urgent written inquiries including inquiries Within 7 days 1 day 2 days Non-urgent written inquiries including inquiries Within 10 days 1 day 2 days Telephone inquiries Within 1 day Less than 1 day Less than 1 day Plan Service Stats Interviews, Seminars and On-Line Services: ATRF staff conducted 2,300 personal interviews throughout Alberta. About 1,500 plan members attended our pension seminar at conventions and other sessions. Almost 16,000 plan members are registered to take advantage of the functions available through On-Line Services. Over 5,600 plan members have chosen to receive mailings such as newsletters, statements, and the Annual Report Highlights in electronic format by registering for Join Our List. 8

10 Surveys Deliver High Marks 2011 Plan Member Survey ATRF received high ratings from over 2,700 plan members who responded to our eighth most recent plan member survey. The survey was distributed electronically in March to almost 13,000 active members who were registered for On-Line Services and achieved a high response rate of 21%. The objectives of the survey were to assess how well ATRF is meeting plan member information and service needs, to evaluate the effectiveness of ATRF programs and information sources, and to measure ratings over time. 96% indicated that the annual plan member statement helped them understand their pension benefits, it was informative, and it was easy to read. 95% found the active member newsletter to be easy to read, informative and timely. 98% of respondents who visited the website found it to be very informative and 92% said it was easy to find information on the website. 94% of respondents who used On-Line Services indicated the pension and purchase calculators were valuable tools. Of the 1,538 respondents who viewed the videos on our website, 86% rated them from good to excellent. The majority of the 319 written comments indicated ATRF staff is doing a great job, and that the website and communication material is meeting plan member needs. New Pensioner Questionnaire Each of the 986 plan members, who retired during the fiscal year, received a New Pensioner Questionnaire. Of the 14% who responded: 98% rated ATRF service and communication as good to excellent; 60% indicated they were registered for On-Line Services; 88% said they had visited the website; and 53% had used the web calculator to do pension estimates. The majority of the comments were positive and focused on excellent customer service and the excellent knowledge of ATRF staff. We will use the comments and suggestions to continue to improve the level of customer service provided to our retiring plan members. 9

11 Plan Liability, Funding & Investment Structure Teachers Pension Plan: Pre-1992 Period The liabilities of the Pre-1992 Period consist of the actuarial value of the benefits earned for service prior to September There are no fund assets in respect of these liabilities. The Government of Alberta guarantees the payment of benefits related to the Pre-1992 Period and is providing ATRF sufficient funds each month to pay these benefits as they become due, and provided ATRF a total of $421 million in the past fiscal year. Teachers Pension Plan: Post-1992 Period The cost of benefits being earned for service after August 1992, including the 60% cost-of-living pension adjustment provision, is shared equally between active members and the Government of Alberta. Active members are responsible for the additional 10% cost-of-living pension adjustment provision. Funding deficiencies under the plan are amortized by additional contributions from active members and the Government of Alberta over a 15-year period. The Board has adopted a funding policy that sets out the principles and guidelines governing the funding requirements of the plan in accordance with the plan s legislation and the objectives of the Board. The overall objective is to ensure the sustainability of the plan over the long term and to ensure the provision of benefits to plan members and their beneficiaries. The Board is undertaking a comprehensive review of plan funding with management and the plan s actuary, in light of the changing economic and financial environment. The margin for adverse plan experience will be reassessed and may be increased to provide for additional reserves to enhance protection against uncertainty and to mitigate the transfer of liability for benefits being earned today to future generations. An increase in the provision for potential adverse plan experience will increase plan liabilities and result in increases to overall plan funding contribution rates. We anticipate that the review should be completed by mid-2012 and information on the changes to the funding policy and contribution rates will be presented at that time. 10

12 Target Policy Asset Mix The Board has adopted the following long-term target policy asset mix. It was based on a comprehensive asset-liability study of the plan in 2009, the plan s funding policy and the fact that the plan has relatively immature liabilities and will have positive cash flow for the next 15 years. Long-Term Target Policy Asset Mix 50% Return Enhancing Global Equity 30.0% Canadian Equity 10.0% Private Equity 10.0% 25% Liability Matching Universe Bonds 11.5% Long-Term Bonds 11.5% Money Market 2.0% 25% Inflation Sensitive Real Estate 15.0% Infrastructure 10.0% The change to this new long-term target policy mix is significant and will be gradually implemented over the next few years. In particular, the investment into the illiquid, inflation-sensitive asset classes of real estate and infrastructure, and the increased allocation to private equity will take considerable time to fully implement. Funding Valuation Results An actuarial funding valuation of the Post-1992 Period Teachers Pension Plan was completed as at August 31, The following table outlines the results of the funding valuation as at August 31, Teachers Pension Plan Post-1992 Period at August 31, 2011 ($ Billions) Funding Liabilities Funding Value of Assets Funding Deficiency The funding valuation showed that a total contribution rate increase of 1.14% of total teacher salaries may be required effective September 2012, 0.60% for teachers and 0.54% for the Government of Alberta. Just over half of the increase resulted from a change to the mortality assumption to recognize ongoing improvements in life expectancy. The remainder of the increase is related to a portion of the deferred investment losses from the financial crisis that will have to be recognized by August 31, The actual contribution rates effective September 2012 will be set by the Board when its review of the funding policy is completed by mid

13 Teachers Pension Plan Contribution Rates Sept 2010 Estimated (Percent) to Aug for Sept Teachers Total Teacher Contribution Salary up to YMPE Salary above YMPE Government YMPE is the Year s Maximum Pensionable Earnings used by the Canada Pension Plan ($50,100 in 2012). Plan Funding Challenges A key assumption in the funding of the Teachers Pension Plan is that the fund will earn an average investment return each year of 6.75% net of investment costs. To even out the impact from the volatility of market returns on the plan s funded status, the plan uses an actuarially accepted practice of smoothing market returns over a fiveyear period to moderate short-term adjustments to contribution rates. The August 31, 2011 funding valuation showed that, primarily due to the financial crisis, the current market value of plan assets is $514 million less than the asset value used to assess plan s funded position. This means that the fund must earn at least 6.75% each year for the next three years and must also earn an additional $514 million to avoid further contribution increases. If the plan s investments earn only 6.75% each year over the next three years, the funding deficiency will grow and the additional amount will have to be amortized by increasing funding contribution over a 15-year period. We have estimated that should this occur, overall funding contributions would increase over the three years ending August 31, 2014 for a total increase of about 1.6%. Funding Risks Looking Forward The funding valuation is based on assumptions that will differ from actual plan experience. Any difference between the assumptions and plan experience will emerge as gains or losses in future funding valuations. Key among those assumptions is the expected rate of return of the fund and there can be significant deviation from this estimate over shorter periods of time. The plan experienced significant negative deviations from the longterm expected rate of return over the past 11 years. In addition, as a result of the major decline in global interest rates, we anticipate lower returns for the next few years. The approach to smoothing investment gains and losses adopted by the plan has allowed the plan to postpone dramatic contribution increases that would otherwise have been triggered by the financial crisis. This has provided the plan time for some measure of market recovery and to better gauge the longer-term contribution increases that will be required. However, it is becoming apparent that the effects of the financial crisis will linger for some time in the form of lower expected returns. Therefore, the plan s funding deficiencies will most likely continue to grow and contribution rates will need to increase further. 12

14 Investment Performance Long-Term Investment Performance The primary long-term investment objective of the fund is to meet the real rate-of-return target above the level of Alberta inflation. This target is an essential long-term assumption in determining the funding requirements of the plan to ensure that plan benefits are funded in accordance with the established funding structure. This long-term investment objective is measured starting September 1, 1992, when the plan sponsors agreed to the current funding structure of the plan. Since September 1, 2004, the longterm rate-of-return assumption has been 4.25% above the level of Alberta inflation. This target was 4.5% plus inflation from September 1, 1997 to August 31, 2004, 4.0% plus inflation from September 1, 1994 to August 31, 1997, and 3.5% plus inflation prior to that time. 19-Year Return vs. Long-Term Investment Objectives to August 31, 2011 Teachers Pension Plan Return Long-Term Investment Objective 6.9% 6.6% Benchmark Performance of Fund We measure the ongoing effectiveness of our investment strategies by comparing the actual performance of the investment portfolio to the return on the fund s benchmark. Benchmarks for each asset class are selected by the Board and Investment Committee. The total-fund benchmark is calculated by aggregating the asset-class benchmark indices, which are weighted to reflect the fund s policy asset mix. Teachers Pension Plan Return vs. Benchmark Performance to August 31, Year Return 7.8% In the 19 years since September 1, 1992, the investment return of the Teachers Pension Plan has surpassed this long-term objective. The annualized rate of return on the fund s assets over this time period has been 6.9%, which exceeds the 6.6% rate-of-return objective. 1-Year Benchmark 10-Year Return 10-Year Benchmark 7.3% 4.5% 4.3% 13

15 Profile The Alberta Teachers Retirement Fund Board (ATRF) is a corporation established under the Teachers Pension Plans Act. ATRF is the trustee, administrator and custodian of the assets of the Teachers Pension Plan for all Alberta teachers employed in school jurisdictions and charter schools. The plan is a defined benefit pension plan registered under the Income Tax Act and is sponsored by the Government of Alberta and the plan members, who are represented by The Alberta Teachers Association. These plan sponsors are responsible for changes to plan design, benefits and funding, and share in plan gains and losses. The Teachers Pension Plan covers: 38,023 active teachers; 22,970 pensioners; and 12,131 inactive teachers. management From left to right: Derek Brodersen, Peggy Corner, Myles Norton, Emilian Groch, Margot Hrynyk, Albert Copeland. Emilian V. GROCh Chief Executive Officer Derek M. BRODERSEN Chief Investment Officer ALBERT Copeland Director, Information and Technology Services PEGGY CORNER Director, Benefit Information Services MARGOT HRYNYK Director, Human Resources and Communications MYLES NORTON Director, Financial Services 14

16 600 Barnett House, ST NW Edmonton, Alberta, T5N 2R1 Telephone: Toll Free: Fax: Web: Visit our website, to view the complete 2011 Annual Report.