Investments > Investment Basics > Investment FAQ

Investment FAQ

How big is the CAAT Pension Plan? How does it compare in size to other plans?

The CAAT Pension Plan has about 17,500 Members and about 11,000 Pensioners. As of December 2007, the Plan's assets were valued at $5,444 million. This means that by asset value, there are about 25 pension funds larger than the CAAT Plan in Canada.

How does the CAAT Plan's investment performance compare to other plans?

It's natural to try to compare the performance of pension plans, however the variation between plans in terms of membership, demographics, asset mix, risk tolerance and liabilities and the amounts of benefits promised means that any simple comparison of returns will be misleading.

The makeup of the population for which each pension plan is created is different. The ratio between active members and retirees results in different asset mixes (the allocation of assets between different asset classes). Typically, a pension plan with a higher percentage of retirees may have an asset mix with a higher proportion in fixed income securities. Conversely, a plan with a young population, that has fewer retirees, may have more in equities. A younger plan has more time to recover from a severe market downturn and can take on more risk than a plan with more members in or close to retirement.

The returns of these two plans will be different depending on the performance of the capital markets. If bonds perform better than equities, the plan with the higher bond content will perform better than the plan with more equities. Also, pension plans have different "risk tolerances" (the ability to withstand a loss). As a result, two plans with a similar structure in plan membership may have different asset mixes because of their differing ability to absorb losses over the short term.

A meaningful way to compare the performance of pension plans is to measure their added value over the passive policy benchmark. A passive benchmark return will reflect the fund's asset mix invested in passively managed or indexed investments. The unique nature of each pension plan's liabilities should determine their asset mix. Therefore, the asset mix decision is removed from the comparative analysis. What is left is the plan's ability to add value in comparison to a passive policy benchmark.

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Who chooses the Plan's investments? How do they decide what to invest in?

The asset mix established by the Plan is the result of an ongoing and detailed analysis of available assets and future liabilities. Several specialist investment Managers are engaged to invest the pension fund assets with the goal of enhancing returns. Each firm has its own mandate that is based on their unique investing style. The Managers are responsible for investing in their target asset class and meeting their performance target, while remaining within the parameters set by the Plan.

Managers must report regularly to the Plan's internal investment team, which overseas the activities of the Managers. These individuals are responsible for establishing the overall structure for each asset class, as well as determining the investment styles and strategies used by the Managers. They negotiate Manager contracts, report on performance and make recommendations on investment policy matters to the governing fiduciaries.

The Plan's governing fiduciaries consist of the Board of Trustees and its Investment Committee. They retain the ultimate responsibility for the management of the Plan's assets. The Board establishes the Plan's investment objectives and policies while the Investment Committee reviews the performance of the fund and asset classes.

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What is the purpose of the Actuarial Valuation?

The main goal of the Plan is to be fully funded so that promised pensions can be paid. The actuarial valuation is the document that tells us whether or not we are fully funded.

An actuarial valuation is an analysis of a pension plan's financial condition. It calculates the liabilities of the plan - the cost of paying current and future pension benefits - and compares them to the assets - the contributions and investment earnings in the pension fund. When the assets exceed the liabilities, the plan has a surplus. When the liabilities exceed the assets, the plan has a deficit.

The actuarial valuation provides a snapshot of assets and expenses for the current year, and attempts to make reasonably accurate assumptions about what the liabilities - the payment of pensions - will be in the future. Investment professionals rely on this information when developing their investment strategies.

The valuation is prepared by an actuary, a professional who applies knowledge of probability, statistics and risk theory to financial situations involving future uncertainty. Usually these situations relate to insurance, annuities, pensions, or other employee benefits. Along with specialized knowledge, the actuary employs a number of assumptions in the analysis. These include assumptions about what markets will do in the future, what is going to happen to interest rates and inflation as well as assumptions about Plan demographics. Subtle changes to these assumptions can have a dramatic impact on the results.

The CAAT Plan conducts an actuarial valuation each year, although the regulatory authorities only require pension plans to file a valuation once every three years. Many larger plans do this, so that they do not have to wait for three years to get an update on the financial situation and possible trends it suggests. It also allows planning for any action required if there is a substantial surplus or any deficit.

The valuation must demonstrate financial viability for the Plan (the ability to pay its promised pensions) in two ways:

On an ongoing basis (the funding valuation)
In the hypothetical situation that the Plan has come to an end (the solvency or windup valuation)

If the valuation does not demonstrate financial viability - it has a deficit - the Plan must take corrective action to change this. In our case, our Funding Policy addresses any deficit situations, and outlines the priorities for the use of any surplus.

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October 2008