We have compiled answers to investment and pension questions received from plan members regarding our 2008 performance results. Investment questions are first, followed by pension questions.
1. Why was the fund’s benchmark negative in 2008? Why wouldn’t you set a positive target for your investment managers?
The fund’s benchmark is not the same as a target. Our target – or goal – is to earn enough to pay pensions 70 and 80 years from now. Our benchmark is the annual performance of the markets in which we invest.
We pick stocks and then compare how well our portfolio did to how well the markets performed. For example, the benchmark for Canadian stocks is the S&P/TSX 60 index performance. U.S. stocks are measured against the S&P 500 index performance.
Most types of assets lost value in 2008, except for government bonds, so our overall fund benchmark was negative. We use different indexes, or benchmarks, to measure our performance in stocks, bonds and other investments. Please see our 2008 Annual Report for a full list.
2. Why did the investment managers and executives get any bonuses for 2008, given the fund’s 18% investment loss?
We pay investment employees bonuses if their portfolios earn more money (or lose less money) than market returns over four-year periods. For example, if our U.S. stocks return more than the S&P 500 index, those managers earn a bonus. Compensation is approved by the plan’s board members. Total incentive compensation last year was down by almost 40% for investment staff and by almost 50% for five senior executives named in our annual report. They still received bonuses because over the past four years, the fund’s performance has been better than the overall fund benchmark. However, the poor 2008 results will continue to lower bonuses for the next three years.
3. How much did CEO Jim Leech receive in 2008?
As disclosed in the 2008 Annual Report, Mr. Leech’s base salary was $441,923. His short-term incentive payment of $435,600 has been deferred until 2011. His long-term incentive payment was $1,148,900. He received “other” compensation of $10,365, which includes one or more of the following: life insurance, automobile allowance or unused vacation cashout. That adds up to total compensation of $2,036,788, which is down from total compensation of $3,367,235 in 2007.
Details about compensation paid to other executives in 2008 are also available.
4. What is the rationale for awarding bonuses when the plan has a funding shortfall?
Incentive compensation is not related to the plan’s funding status. The Ontario Teachers’ Federation (OTF) and the Ontario government, which jointly sponsor the pension plan, are responsible for setting plan benefit and contribution levels as well as plan funding decisions.
Our investment professionals are paid for their performance compared to standard market benchmarks. We pay incentive compensation when they earn returns in excess of how well markets performed over four-year periods.
This year’s incentive compensation is based on three good years (2005, 2006 and 2007) and one bad year (2008). The results from 2008 will continue to affect staff and executive compensation for the next three years.
5. Why did Teachers' not invest in commercial paper?
It is noted in our annual report that we had no material investment in non-bank asset-backed commercial paper covered by the Montreal Accord. We completed due diligence and decided not to invest in these securities, but we did have a very minor exposure through an external manager we use.
However, we do invest in commercial paper after due diligence if we are comfortable with the investment.
6. Why does our pension fund seek to acquire controlling interests in corporations?
When we have large stakes in companies, we try to enhance the value of the pension fund’s holdings, and there are several ways we can do this. Having a controlling interest allows us to appoint board members and influence the company’s direction according to our investment objectives.
7. Is any part of our pension fund invested in AIG or its subsidiaries?
We did have investments in AIG last year. Some of our external managers held AIG stock, and we also held some shares in internal portfolios that we manage. All positions had been sold by December 31, 2008. We are not investors in AIG today.
It is our opinion that AIG did not disclose adequate information to shareholders about its risks and we are participating in the class action against AIG. When the extent of AIG’s difficulties became clear, we exited the investments.
We are in the investment business. We take appropriate risks to earn returns, but not every investment will win.
8. How much money was made or lost on hedge funds, commodities and derivatives over the years?
Over the years, these have been beneficial investments for us. However, virtually nothing escaped the market rout last year. Usually some investments go up and some go down in a single year but we lost money on all three in 2008.
Hedge funds have helped us generate better returns in recent years than we could get from government bonds and they gave us added diversification. However, last year, we lost $900 million on hedge fund investments.
Commodities lost 33% last year, but less than 2% of fund assets are invested in these markets. Commodities prices swing up and down - but when the economy is hot, inflation generally rises, and commodities usually do well. We invest in commodities as a hedge against inflation.
We lost money on derivatives last year and this is part of the $6.7 billion loss reported in the fixed income asset class. We have used derivatives since 1990 to gain exposure to equity and commodity markets because it is more cost-effective and efficient than buying the actual stocks and commodities. We also moved into credit derivatives in recent years and these were fundamentally affected by the credit crisis. We have reduced our holdings in hedge funds and credit products but we will continue to use derivatives to manage the fund.
9. Should our pension plan be investing in higher-risk investments such as derivatives? They are very complex - how can you accurately assess potential losses?
We have used derivatives since 1990 to get exposure to equity and commodity markets and we will continue using them. Derivatives are not inherently risky; they offer a means to get exposure to certain markets in a way that is efficient and cost effective. We take appropriate risks to earn returns to pay pensions.
10. How has the economic downturn affected our pensions?
The economy has not affected pensions for retirees or pension credit that working teachers have already earned. Members’ pensions are defined by a formula based on their years of service and average earnings – they are not dependent on any one year’s investment results.
Contribution rates and pension benefits to be earned in future years can be adjusted during a teacher’s career in response to funding surpluses or shortfalls.
Keep in mind that the pension fund has more than $87 billion in assets, and we pay out approximately $4 billion a year in pension benefits. We have enough money to pay pensions for a long time and have a long-term investment strategy to earn returns for the future.
11. What steps are you taking to collect pension overpayments from individuals who have been identified as violating the plan’s re-employment guidelines?
When we learn a member has exceeded the working after retirement limits, we suspend the member’s pension. We also recover pension payments the member was not entitled to receive.
It’s our job to treat all plan members and school boards consistently and to respond to complaints about the integrity of pension reporting. When we learn of possible violations, we investigate them and take action as necessary.
The Teachers’ pension plan requires members to track and report their re-employment. We also require school board executives to certify their pension reporting once a year. This process, plus random and targeted audits, helps ensure employers comply with the rules.
We depend on members and employers to enter into arrangements that comply with the plan’s provisions.