What is a benchmark?

Measuring the success of an investment portfolio as large and complex as that of the CAAT fund is a challenge. At its core, one can say that more money in the fund means more success. However, this is misleading as it says nothing about how the liabilities of the Plan may have changed. As well, when factoring in the details that have an effect on returns - the asset mix, cost and performance of investment managers, among others - analysis of success becomes considerably more complicated. This is why the Plan administrators need something that functions as an objective target when reviewing the investment portfolio. A benchmark performs this role.

Our pension plan makes use of several benchmarks, with each one playing a distinct role. The major benchmarks include:

• The Plan's liability benchmark
  In addition to performing an annual actuarial valuation to measure the Plan's liabilities, CAAT also makes use of a liability benchmark that is calculated on a quarterly basis. This is a benchmark that is used to estimate the behaviour of the Plan's liabilities, in particular how they change as interest rates and inflation changes. The benchmark is made up of a combination of long term and real return bonds and is used provide an estimate of how the fund's performance measures up to changes in the liabilities.
• The Plan's asset mix policy benchmark
  This benchmark is determined through complex simulations of future returns and changes in liabilities. It takes into account several potential outcomes for such items as returns, inflation, productivity gains, and membership demographics. The end result of this analysis is target allocations to the broad asset classes that the Plan believes will provide the best return and risk profile for the fund to meet future benefit payments.
• The asset class benchmark
  Once the Plan's asset mix policy benchmark is identified, a specific target must be defined for each broad asset class. The Liability Hedging investments include bonds, real estate and infrastructure, while the Return Enhancing investments include domestic and foreign public equities, as well as private equity. For asset classes that trade in the public markets, such as bonds and equities, market indexes are used as the benchmarks. For other asset classes, such as infrastructure, private equity and real estate, benchmarks are more customized.
• Each investment manager's benchmark
  Since we normally use more than one Manager for each asset class, each firm must be provided with a clear target for performance. Therefore, we specify a benchmark for each investment Manager along with an appropriate value-added target above the benchmark.

Passive and Active management benchmarks

Within the investment Manager benchmarks, there are defined parameters for active and passive management.

• A Manager with a passive mandate is expected to invest in the same securities that appear in the relevant index. The goal is to achieve the same return as the benchmark - there is no expectation to outperform the index or exceed the benchmark.
• An investment Manager that employs active management strategies is expected to beat the relevant index, and therefore achieve higher returns. Active management is considered successful if the return (net of fees) exceeds what would have been earned by investing passively. The CAAT Plan's investments are primarily managed on an active basis.

Regardless of actual returns reported by the Managers, it is the outcome compared to appropriate benchmarks that measures the success of the Plan's investments. The CAAT Plan's investment team has procedures in place to monitor and report on the performance of each investment Manager to ensure their strategies remain on target and appropriate to their mandates.

This table shows the Plan's benchmarks applied to active and passive Manager mandates: