Retired pension actuary Dan Morrison has written an outstanding submission in support of Bill 203, the Pension Protection Act. Morrison worked in the pension and benefits industry from 1984 until his retirement in 2018, mostly employed by major consulting firms. He provided professional advice on the design, funding, governance and regulation of pension plans to major public and private sector organizations, including OMERS and HOOPP, two of Ontario’s largest public sector pension plans. In addition to being a Fellow of the Canadian Institute of Actuaries, he is also a Chartered Financial Analyst.
Dear Sirs and Mesdames,
I am writing to offer a few comments on Bill 203. First, I would like to confirm that I have no personal stake in this issue. I am not a teacher, and no one in my immediate or extended family is a teacher in Alberta. However, as a pension industry professional with over 35 years of experience and extensive actuarial and investment knowledge, I believe I have some relevant and credible insight to offer.
For me, the crucial issue is whether the the Government of Alberta should be dictating how the Alberta Teachers' Retirement Fund (ATRF) can invest the pension fund assets, including dictating which investment fund manager(s) should be used. Investment decisions, including the choice of asset managers, are a fundamental aspect of pension plan governance and should remain in the purview of the Board of ATRF. Based on past performance, they have been doing an excellent job so far, and should be allowed to continue doing so.
You may be aware that other provinces, notably Ontario, have increased the autonomy granted to their large public sector pension plans such as OMERS and the Ontario Teachers' Pension Plan over the past 20 years in the belief that the participating members and employers, through their elected board members, are better placed to manage their pension plans than inflexible acts of government. Having been the actuary for two of Ontario's largest pension plans before moving to Alberta, I can assure you that pension board members take their roles very seriously and only make decisions after very thoughtful deliberation and consultation with experts. I have no doubt that the ATRF Board members are equally thoughtful and diligent in their oversight of ATRF. It seems odd to me that the Government of Alberta would move in the opposite direction of the rest of the country and reduce the autonomy for decision making of the Alberta public sector pension boards. I have seen no credible arguments from the Government that this may be necessary.
The key argument in favour of forcing ATRF to move its assets to AIMCo is a reduction in investment fees, purportedly to 20 basis points (bps) per year (0.20%). I agree that this expense rate is very attractive, particularly for active management. However, the argument is highly flawed. Cheaper is not always better. It is logical to pay more for investment management services if the additional investment return exceeds the additional fees. For example, passive management (i.e., index funds) are very cheap and would be available to ATRF for as little as 5 or 6 bps. If an active investment manager charges 50 bps, but can consistently outperform the index by 75 bps, then they are more than earning their fee and the pension fund accrues a net benefit. I can assure you that such decisions are made by private sector pension plans regularly, and I have assisted in many such decisions during my career.
Despite having a slightly higher expense ratio, ATRF has outperformed its counterparts who must use AIMCo for asset management by approximately 1.5% per year, net of fees, over the past 11 years. Why should ATRF give up their additional returns (which result in lower contributions for employers and members) in return for a slightly lower expense rate? The pension fund and all of its stakeholders would be net losers from this trade. Does the Government really want to increase employer and member contributions? I don't remember anyone campaigning on this promise.
Finally, I must comment on the recent news of AIMCO's significant investment loss due to trading in volatility derivatives. The extent of AIMCo's activity in this asset class raises serious questions about AIMCo's governance. The derivatives in question can provide modest additional returns during times of normal market activity. However, they are destined to produce large losses during a sudden economic crisis when other key investments (i.e., publicly traded equities) are in turmoil and falling sharply. That is, just when the investment fund is suffering substantial losses in its equity investments, these derivatives double down on the losses. Such derivatives are highly inappropriate investments for pension plans, except (perhaps) in very small allocations. Pension funds require strict risk management protocols, where risk is defined as assets growing more slowly than liabilities. During past economic crises (such as the 2008 financial crisis), equities fell sharply in value, interest rates fell, and pension liabilities increased substantially. Proper risk management would include substantial allocations to investments that rise in value as interest rates fall, just like pension liabilities do. Long term bonds come to mind, but there are other investments that are similarly sensitive to interest rate changes. Volatility derivatives provide no element of risk management that is helpful to a pension plan. Why was AIMCo gambling with its clients' money?
I understand that experts have been hired to review AIMCo's risk management and governance, including Barbara Zvan, an actuary who is extremely well qualified for the task. Until a thorough review has been completed, and there is strong evidence that AIMCo has learned from its mistakes and has effectively implemented enhanced governance and risk management, no further assets should be given to AIMCo for its management. Even then, it should be left up to each pension plan to choose whether to use AIMCo or not. The ATRF Board is well qualified to judge for itself whether AIMCo can develop into a more effective investment manager.
In closing, I strongly recommend the adoption of Bill 203 so that ATRF can maintain full control of its assets and make appropriate choices for their investment. To do otherwise would be choosing a false economy and would almost certainly result in higher pension contributions over the long term. ATRF has proven over long periods that it has highly effective governance systems. Please allow the ATRF Board to continue its good stewardship.
Daniel J Morrison FCIA, FSA, CFA