Members > Newsletters > Fall 2009

Investments - measuring liabilities

Investments

The Plan's investments are continuing their upward turn, with the fund reaching $4.7 billion at the end of the third quarter. The total fund return to the end of September is 12.7%.

Our investment strategies are designed to support the Plan's overriding goals of stable contributions and secure pensions. This means being able to fund all our liabilities (pension payments). Therefore the liability hedging side of the investments is a key piece of the strategies. These investments can be used to reflect the behaviour and sensitivities of the liabilities, which change along with inflation and interest rate movements.

Our liability hedging investments include infrastructure and real estate funds, along with long term fixed rate bonds and real return bonds (bonds that take inflation into account as part of their payments).

Aside from our main tools for measuring liabilities, which are actuarial valuations and assetliability studies, we use a liability benchmark to measure our progress and help account for the economic risks of our liabilities. The benchmark is composed of long term fixed rate and real return bonds. Over the first three quarters of 2009, this liability benchmark showed an 8.6% return, versus the actual total return of 12.7%.

Of course, the return enhancing investments - those that offer the potential for higher returns, mainly equities - are also important, and are a large part of the reason that we expect the total fund return will exceed the liability benchmark return over the long term. Higher returns help us keep contributions reasonable. The mix of liability hedging and return enhancing asset classes determines the amount of volatility that we believe the Plan can manage.

For 2010, we will continue to work towards the target asset mix, building up real return bonds and our investments in real estate and private equity. We will also investigate ways to strike the appropriate balance in equity risk, and look at refining the policies that manage our long term stability.

The tables on these pages show our assets as of September 30, 2009, and the Asset Mix Policy Benchmark return for 2009 to the end of September for the main asset classes in the fund.

While the absolute level of performance of the fund has been strong, the investment managers that we engage to manage the equity portfolios have underperformed their respective benchmarks so far this year. The strong equity market rally that began in March has largely been driven by the performance of lower quality, riskier stocks that our managers did not select for their portfolios. At the end of the third quarter and beginning of the fourth quarter however, there have been signs that the high quality companies held in the fund are starting to outperform.

Policy benchmark return to September 30, 2009

Asset category	Benchmark return (%)	Fund return (%)
Bonds	7.0	9.3
Canadian equity	30.0	22.6
Non-Canadian equity	17.0	14.0
Total fund	14.4	12.7

Assets as of September 30, 2009

Asset category	millions $	% of fund	Target % of fund
Bonds	1,768	38	28
Infrastructure	151	3	10
Real estate	97	2	5
Total - Liability Hedging	2,016	43	43
Canadian equity	623	13	13
Non-Canadian equity	2,103	44	39
Total - Return Enhancing	2,726	57	52
Total	4,742	100	95*

* The target asset mix includes a 5% allotment to private equity which is currently being developed.

December 2009