Members > Newsletters > Special Edition Summer 2009

Our Plan is focused on the future

Investments

The financial crisis that started in 2007 has affected equity and credit markets around the world. Although we fared somewhat worse than some large Canadian plans, and better than others, all institutional investors had problems in 2008. Global markets around the world suffered, and continue to face uncertainty.

Taking a long look

This is not a time for drastic action. Funding the Plan is a long term endeavour. Over long time periods, the Plan requires a 4.5% annual investment return, above inflation, to sustain our pension payments. In some years, such as 2008, this standard is not met, but in many years it is noticeably exceeded. The longer time frame makes sense because the paying of pensions extends over many years, as the Plan continues indefinitely.

This does not mean that we do not monitor short term results closely, or that we are not concerned about poor returns. We expect that markets will experience significant volatility over shorter time frames, and we consider this when developing our investment strategies.

As has been the case a number of times in history, markets were "irrational" in 2008, in that they were driven as much by fear as by the deteriorating fundamentals. This fear increased the market volatility we witnessed, which led to poor returns for our active managers. These managers invest in high quality companies with sound fundamentals that will perform well over the long term, which is where it counts most for us. While we wait for the strength in fundamentals to return, it would not be prudent to make substantial changes. We rely on our investment returns to help us fulfill our commitment to the pension promise, and patience and confidence are important components of our program.

Some carefully planned changes

The Plan has developed its investment focus over the course of the past few years, from one that largely considers assets in isolation to one that better considers the behaviour of the fund's assets relative to the behaviour of the liabilities. We now view our assets as falling into one of two umbrella groups: return enhancing and liability hedging. This helps us understand the risks we are taking, and is referred to as Liability Driven Investing.

We have also been increasingly active in revising the asset mix over the past few years. Decisions to make these types of changes are made after careful review and analysis – not as a band-aid solution to one or two years of poor returns. Our goal is always to remain fully funded over long time periods.

Our move into infrastructure investments began in late 2005, with an allocation of 3% of the fund. This target was increased to 5% of the fund in 2006, and then to 10% in 2007, after an asset–liability study was conducted. As a result of the study, we also added allocations to real return bonds, real estate, and private equity.

Although investments that will meet these allocations are in progress, it will be a few years before they reach their target percentages. We are building these positions prudently, taking advantage of opportunities that current lower prices in many asset classes present.

July 2009