2008 Annual Report Highlights. Alberta Teachers Retirement Fund Board

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1 2008 Annual Report Highlights Alberta Teachers Retirement Fund Board

2007-08 Highlights of the Post-August 1992 Teachers Pension Plan Fund Results Over the 16-year period since September 1, 1992, the Post-August 1992 Teachers Pension Plan has on average earned 8.

2 Highlights of the Post-August 1992 Teachers Pension Plan Fund Results Over the 16-year period since September 1, 1992, the Post-August 1992 Teachers Pension Plan has on average earned 8.0% each year, exceeding the funding rate-of-return objective of 7.0% by 1% each year For the year ended August 31, 2008, the fund declined 2.8% Key Accomplishments 2007/08 Provided plan sponsors with proactive assistance throughout their negotiations of the November 15, 2007 Memorandum of Agreement Enhanced customer service by increasing availability of member counseling throughout Alberta and implementing secured remote access to plan member benefit and information systems by ATRF field service staff Established a reciprocal transfer agreement with other Alberta public sector pension plans Exceeded service turnaround benchmarks for all services to plan members Implemented a marketing initiative that successfully increased usage of the website and On-Line Services registration Commenced a program to enhance governance and management of internal control over financial reporting Finalized the structure for, and implemented, ATRF s private equity and active currency investments Recognized as having one of the lowest plan member service costs in the industry at $69 per member Table of Contents Report of the Board Chair...3 Post-August 1992 Teachers Pension Plan...6 Report of the Chief Executive Officer...7 Returns Exceed Funding Objective...9 Benchmark Performance of Fund...10 Plan Member Services...11 Plan Service Stats...12 ATRF Profile...13 Corporate Directory

3 Membership Profile 54% Active 37,462 Post-1992 Period Teachers Pension Plan Asset Mix at August 31, % Equities Canadian 23.3 % Global 20.1 % EAFE 11.8 % U.S % Private 2.2 % 30% Pensioners 20, % Loan Receivable from Province 16% Inactives 11, % Fixed Income Bonds 11.1 % Money-Market 2.9 % Change in Net Assets The Post-August 1992 benefit period of the Teachers Pension Plan assets increased 19% over the past year by $832 million to $5.107 billion, primarily as a result of the Memorandum of Agreement. A significant new component of the total assets as at August 31, 2008 is the accumulated loan receivable from the Government of Alberta of $944 million. The impact of the recognition of this loan, as well as positive net cash flows from contributions above required benefit payments of $255 million, were offset by negative investment earnings of $208 million arising from the decrease in global investment markets during the year. Net Assets ($ Billions) * * Includes the Loan Receivable from Province See Report of the Board Chair, page 3. 2

The Memorandum of Agreement will result in major changes to the way benefits will be financed.

On November 15, 2007, the Government of Alberta and The Alberta Teachers Association announced a tentative Memorandum of Agreement that resulted in major changes to the way benefits under the

The current total amortization contributions for the Pre-1992 Period unfunded liability are not sufficient to pay the pensions for plan members who earned service prior to September 1992.

4 The Memorandum of Agreement will result in major changes to the way benefits will be financed. Report of the Board Chair This past fiscal year marked a historic event in the funding of the Teachers Pension Plan. On November 15, 2007, the Government of Alberta and The Alberta Teachers Association announced a tentative Memorandum of Agreement that resulted in major changes to the way benefits under the Teachers Pension Plan would be financed. The New Pre-1992 Period Funding Structure There are no assets for the pre- September 1992 benefit period of the Teachers Pension Plan (Pre-1992 Period). The current total amortization contributions for the Pre-1992 Period unfunded liability are not sufficient to pay the pensions for plan members who earned service prior to September Legislation requires the post-august 1992 benefit period of the Teachers Pension Plan (Post-1992 Period) to lend funds to the Pre-1992 Period to meet Pre-1992 Period benefit payments. In accordance with the Memorandum of Agreement, the Government of Alberta has taken over the teachers Pre-1992 Period unfunded liability funding contribution of 3.1% of salary until August 31, This means that the Government of Alberta will make the total funding contribution in respect of this unfunded liability. Effective September 1, 2009, the funding contributions in respect of the Pre-1992 Period unfunded liability will cease and the funding for Pre-1992 Period benefits will move to a payas-you-go structure. Under this structure, the Government of Alberta will provide sufficient funds for ATRF to pay Pre-1992 Period benefits, without resorting to any further borrowing from the Post-1992 Period. The Memorandum of Agreement provides that the loan may be repaid after The Government of Alberta has not determined its plans on the repayment of the loan. A decision is expected by early The Government of Alberta has fully recognized the Pre-1992 Period unfunded liability in the Province s 3

5 March 31, 2008 Consolidated Financial Statements. Consequently, ATRF is now only responsible for managing the investment structure of the Post-1992 Period fund and setting the contribution rates for the post-1992 Period. The Government of Alberta is responsible for the funding of Pre-1992 Period benefits. Once the Government of Alberta advises ATRF on the timing of the repayment of the loan from the Post-1992 Period, we will conduct a comprehensive assetliability study to determine the optimum future investment asset mix. A revised funding objective, risk structure and policy asset mix will be set, resulting in a revised long-term investment rate of return assumption. This rate is currently 7.25% per annum and is based on an investment policy asset mix reflecting a higher exposure to equity investments. That investment policy asset mix may no longer be appropriate, given ATRF s revised focus on only the liabilities and assets of the Post-1992 Period. It is likely that the level of equity investment risk in the fund will be reduced and the expected long-term investment rate of return will decrease accordingly. It is anticipated that an actuarial valuation of the Post-1992 Period plan will be conducted as at August 31, That valuation will use the revised longterm investment rate of return and the resulting increase to plan contributions will be effective September 1, Post-1992 Period Teachers Pension Plan Contribution Rates The actuarial valuation showed the following: The cost of future benefits to be earned by teachers increased a small amount, 0.21% of total teacher salaries, to 14.50%. Under the legislated funding structure, this means both the teachers and the Government of Alberta must contribute 7.02% of salary for the current benefit cost, including the 60% cost-of-living benefit. Teachers contribute a further 0.46% of salary for the additional 10% cost-of-living benefit they are solely responsible for funding. Over the two-year period since the last actuarial valuation as at August 31, 2006, the deficiency in respect of the Post-1992 Period increased more than expected Contributions September 2009 (Percent of salary) Teachers Government Total Cost of Future Benefits Additional 10% COLA TOTAL

6 to $1.048 billion due to $308 million in losses arising from plan experience being different from that anticipated. The resulting total amortization rate for the deficiency is 3.94% of total teacher salaries. Consequently, the cost to amortize the deficiency has increased by 0.47% of salary for teachers and 0.44% of salary for the Government of Alberta. Both the teachers and the Government of Alberta must contribute 1.91% of salary, with teachers contributing an additional 0.12% of salary for the portion of the additional 10% cost-of-living benefit that they are solely responsible for funding. Contributions September 2009 (Percent of salary) Teachers Government Total Post-1992 Deficiency Additional 10% COLA TOTAL The combined contribution rate requirement by both teachers and the Government of Alberta for the Post-1992 Period is 18.44% of all teacher salaries. The table below shows the September 2008 contribution rates and the revised contribution rates that will come into effect September 2009, based on the results of the August 31, 2008 actuarial valuation. Post-1992 Period Contribution Rates (Percent of salary) September 2008 September 2009 Teachers Salary up to YMPE Salary above YMPE Government YMPE is the Year s Maximum Pensionable Earnings used by the Canada Pension Plan ($46,300 in 2009) Strengthening Corporate Governance We believe that progressive corporate governance practices of ATRF will contribute to superior long-term value for plan members and sponsors. The Board monitors evolving best practices in corporate governance and regularly implements action plans to enhance Board effectiveness. In the past year, we reviewed the processes for setting the competency requirements of the overall Board, Board evaluation, the assessment of individual Board members, the recruitment of new Board members and implemented a number of enhancements. 5

7 Post-August 1992 Teachers Pension Plan Net Assets Available for Benefits at August 31, 2008 ($ Thousands) Investments Equities $ 3,375,180 $ 3,555,832 Bonds and debentures 559, ,900 Money-market securities 212, ,854 4,147,160 4,264,586 Cash 1,670 1,740 Contributions Receivable 8,965 13,596 Loan Receivable from the Province* 944,099 - Other Assets and Liabilities 4,729 (4,863) Net Assets Available for Benefits $ 5,106,623 $ 4,275,059 * Relates to impact of Memorandum of Agreement - see Report of the Board Chair, page 3. Actuarial Deficiency at August 31, 2008 ($ Thousands) 2008 Liabilities $ 6,290,000 Actuarial Assets 1 5,242,000 Deficiency $ (1,048,000) 1 The Plan uses an actuarially accepted practice of smoothing market returns over a five-year period to even out the impact of volatility of market returns and, accordingly, to moderate short-term adjustments to contribution rates. As at August 31, 2008, the actuarial value of net assets available for benefits was $135.4 million higher than the fair value of net assets available for benefits. 6

The plan is on track to meet its funding and investment objectives over the long term.

The investment markets can result in extreme volatility over short periods of time due to the ever-changing economic and political factors that affect investment markets globally.

period. I am pleased to report that our longterm investment performance has exceeded the funding objective of the plan.

8 The plan is on track to meet its funding and investment objectives over the long term. Report of the Chief Executive Officer Investment returns are particularly important in ensuring the adequate funding of benefits under pension plans. The investment markets can result in extreme volatility over short periods of time due to the ever-changing economic and political factors that affect investment markets globally. The key for long-term investors such as ATRF is to focus on prudent and diversified investments that will provide the returns necessary to meet the funding requirement of the plan over a long-term period. I am pleased to report that our longterm investment performance has exceeded the funding objective of the plan. Over the 16-year period since September 1, 1992, the fund related to the post-august 1992 benefit period of the Teachers Pension Plan has on average earned 8.0% each year, exceeding the funding rate-of-return objective of 7.0% by 1% each year. Recent Investment Market Impacts Over the five-year period ended August 31, 2007, the fund produced, on average, double-digit returns in each of those five years. I noted in my report last year that it was not reasonable to expect such returns going forward. Indeed, the investment markets for the fiscal year ended August 31, 2008 were much more challenging and the fund related to the post-august 1992 benefit period of the Teachers Pension Plan returned -2.8%. The global capital markets were under severe pressure during that period, primarily due to the fallout from the collapse of the sub-prime and assetbacked commercial paper markets that started in mid-2007, and the resulting extreme credit squeeze. The decline in global investment markets became even more extreme after August 31, 2008 and affected all investors. However, the fund is secure for the long term. The fund is well diversified in various asset classes and invested globally, for the long term, in accordance with prudent investment 57

9 policies and guidelines approved by the Board. While the fund has suffered some losses in the short term, it is well positioned to meet its long-term return objectives to ensure that plan benefits are funded in compliance with the established funding structure. The benefits under the plan are safe. The pension and cost-of-living adjustments are calculated based on legislated formulas and not on the investment performance of the fund. Benefits for pensionable service prior to September 1992 under the Teachers Pension Plan are guaranteed by the Government of Alberta. The funding of benefits for pensionable service after August 1992 is structured to make certain that funding contributions are adequate. The funding status of the plan is regularly reviewed and contribution rate adjustments are made as required to ensure that all pension payments will be made. Increasing Funding Contributions As noted in the report of the Board Chair, modest funding contribution increases will come into effect September 1, 2009, based on the results of the actuarial valuation as at August 31, Association, the funding of the Teachers Pension Plan has been significantly changed. This in turn has impacted the liability structure of the plan and the future investment structure of the fund. We will be undertaking a major assetliability study in 2009 to set the optimum future investment policy asset mix. We expect to set a revised long-term investment rate of return assumption that will increase overall plan funding contributions effective September 1, Also, any funding losses that arise due to the impact of the significant decrease in the global investment markets after August 31, 2008 will increase the deficiency under the plan. This deficiency must be amortized over a 15-year period through additional increases to funding contributions. As a long-term investor, the fund is well positioned to weather short-term events in the financial markets. ATRF is confident that in spite of the severe short-term events that the investment markets experienced since August 31, 2008, the fund will meet its funding and investment objectives over the long term and continue to secure the pension income of Alberta teachers. More significant will be the results from the actuarial valuations of the plan as at August 31, As a consequence of the November 15, 2007 Memorandum of Agreement between the Government of Alberta and The Alberta Teachers 68

Returns Exceed Funding Objective Since 1992 The primary long-term investment objective of the fund is to meet the real rate of return target above the level of Alberta inflation.

10 Returns Exceed Funding Objective Since 1992 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 longterm investment objective is measured starting September 1, 1992, when the plan sponsors agreed to the current funding structure of the plan. Over the past 16 years, since September 1, 1992, the fund s investment performance has surpassed the long-term objective. The annualized rate of return on the assets of the post-august 1992 Teachers Pension Plan fund for the past 16 years has been 8.0%, which exceeded the 7.0% rate of return objective by 1.0% per year. Post-August 1992 Teachers Pension Plan 16-Year ATRF Return vs Long-Term Investment Objectives to August 31, 2008 (Percent) ATRF Return Long-Term Investment Objective For the past 16 years our 8% return has exceeded the funding requirements of the plan. 9

Benchmark Performance of the Fund Benchmark indices are used to assess the effectiveness of the fund s

Committee to the fund s performance by asset class.

class benchmark indices aggregated and weighted to reflect the fund s policy asset mix.

11 Benchmark Performance of the Fund Benchmark indices are used to assess the effectiveness of the fund s managers, asset classes and strategies by comparing the benchmarks selected by the Board and Investment Committee to the fund s performance by asset class. To assess the overall performance of the assets of the fund, the fund return is compared to the asset class benchmark indices aggregated and weighted to reflect the fund s policy asset mix. Post-August 1992 Teachers Pension Plan Fund Return vs. Benchmark Performance at August 31, 2008 (Percent) 10-Year Return 10-Year Benchmark Year Return Year Benchmark 10

Plan Member Services Exceed Benchmarks Our goal is to continually improve the level of service we provide to plan members without undue increases in costs.

12 Plan Member Services Exceed Benchmarks Our goal is to continually improve the level of service we provide to plan members without undue increases in costs. A number of initiatives were undertaken last year to achieve our goal of continually improving the level of service to plan members, including implementing a plan to enhance customer service, adding a fourth pension counsellor and increasing the number personal interview sessions and seminars. ATRF has a dedicated and knowledgeable team of employees providing high-calibre, cost-effective benefit and information services to active teachers, pensioners, inactive teachers, beneficiaries, and their representatives. ATRF delivers high quality service in the most efficient and cost-effective manner. We set benchmarks for delivery of services, and measure the timeliness of the services provided against those benchmarks. Below are our service turnaround benchmarks for some of our key processes. We are pleased to report that we exceeded benchmark for all processes during the year. Service Process Benchmark average Elapsed time Ongoing pensioner On the third last business All payments made payments day of the month on time Pension options package Within 10 days 6 days for new pensioner of application Pension payment Within 7 days 3 days for new pensioner Pension estimate Within 7 days 3 days Purchase estimate Within 14 days 2 days Termination benefit Within 10 days 2 days Urgent written inquiries Within 7 days 3 days including inquiries Non-urgent written inquiries Within 14 days 3 days including inquiries Telephone inquiries Within 1 day Less than 1 day 11

Plan Service Stats Interviews, Seminars and On-Line Services ATRF staff conducted 1,340 personal interviews in the field and 1,250 in our Edmonton office 1,700 plan members attended the Your Pension

month over 1,100 plan members accessed their plan member statement through On-Line Services Survey Delivers High Marks In our annual survey of 1,257 plan members who applied for their pension during

13 Plan Service Stats Interviews, Seminars and On-Line Services ATRF staff conducted 1,340 personal interviews in the field and 1,250 in our Edmonton office 1,700 plan members attended the Your Pension Matters seminar at conventions and other sessions registration for On-Line Services reached 13,000 plan members over 20,000 pension estimates were calculated using On-Line Services on average, each month over 1,100 plan members accessed their plan member statement through On-Line Services Survey Delivers High Marks In our annual survey of 1,257 plan members who applied for their pension during new pensioners were asked questions about the quality of service they received from ATRF. They were also asked about the communication material they read during the pension application process, and, if they utilized them, their assessment of our website and On-Line Services. Of the 21% who responded: 98% of respondents rated overall service and communication as good to excellent; 63% indicated they were registered for On-Line Services; 78% said they had visited the website; and 60% had used the online calculator to do pension estimates. Respondents are invited to provide written comments. The majority of comments were positive and focused on excellent customer service and the timeliness of the service provided by ATRF. 12

ATRF is also the trustee, administrator and custodian of the Private School Teachers Pension Plan for teachers employed by those private schools that have elected to join the plan.

14 ATRF works in partnership to secure your pension income. ATRF 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. ATRF is also the trustee, administrator and custodian of the Private School Teachers Pension Plan for teachers employed by those private schools that have elected to join the plan. The plans are defined benefit pension plans registered under the Income Tax Act and are 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 37,462 active teachers 20,778 pensioners 11,502 inactive teachers The value of accrued benefits relating to service accrued subsequent to August 31, 1992 by members of the Teachers Pension Plan exceeds assets by $1.048 billion. The Private School Teachers Pension Plan is fully funded and covers 165 active teachers 141 pensioners 211 inactive teachers 13

Corporate Directory (back row - left to right) Randy Round, Derek Brodersen, Albert Copeland (front row - left to right) Peggy Corner, Emilian Groch, Margot Hrynyk Board & Corporate Board Michael E.

Vogrinetz Gene Williams (appointed October 22, 2008) Committees of the Board Investment Audit James Fleming, Chair Sharon L. Vogrinetz, Vice Chair James M. Drinkwater Michael E.

15 Corporate Directory (back row - left to right) Randy Round, Derek Brodersen, Albert Copeland (front row - left to right) Peggy Corner, Emilian Groch, Margot Hrynyk Board & Corporate Board Michael E. Griffiths, Chair James Fleming, Vice Chair Lesley K. Bowering Greg Meeker Sharon L. Vogrinetz Gene Williams (appointed October 22, 2008) Committees of the Board Investment Audit James Fleming, Chair Sharon L. Vogrinetz, Vice Chair James M. Drinkwater Michael E. Griffiths (effective November 5, 2008) Allison D. O Brien Frank J.D. Sayer Corporate Emilian V. Groch Chief Executive Officer Derek M. Brodersen Chief Investment Officer Albert Copeland Director, Information and Technology Services Michael E. Griffiths, Chair James Fleming, Vice Chair Greg Meeker Finance and Planning Greg Meeker, Chair Gene Williams, Vice Chair (effective November 5, 2008) Peggy Corner Director, Benefit Information Services Margot M. Hrynyk Director, Human Resources and Communication Randy G. Round Director, Financial Services Human Resources and Compensation Lesley K. Bowering, Chair Sharon L. Vogrinetz, Vice Chair James Fleming Michael E. Griffiths Greg Meeker Gene Williams (effective November 5, 2008) We welcome any comments or suggestions for these Annual Report Highlights, or any other aspects of our communications program. 14

16 600 Barnett House ST NW Edmonton, Alberta T5N 2R1 Telephone: (780) Toll Free: Fax: (780) Website: Visit our website to view the complete 2008 Annual Report. Delegates to the ATA s Annual Representative Assembly will also receive the complete Annual Report.

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