Hijacking Alberta Teachers' Retirement Fund?

Joel Dryden of CBC News reports that some Alberta teachers are uneasy and looking for answers after learning their pensions are on the move — without their consultation or approval:

Teachers' pensions are currently managed by the independent Alberta Teachers' Retirement Fund Board, or ATRF, which was established in 1939.

The corporation currently administers pensions for all teachers in school jurisdictions and charter schools in Alberta, with an option for private school teachers to join as well.

But text of the budget released Thursday disclosed the ATRF was "expected to transfer funds to Alberta Investment Management Corporation (AIMCo) for management … AIMCo is expected to provide maximum returns to its clients, and processes will be expanded to support broader agency involvement."

Pensions for Workers' Compensation Board and Alberta Health Services employees will also be transferred to AIMCo, according to the budget.

Lee Martin, who has taught at St. Teresa of Calcutta School for seven years, said a lack of consultation was what most bothered him.

"You know, there are close to 40,000 teachers in the province. This pension is pretty big," Martin said. "Every teacher is putting away something close to something like a second mortgage a month. So that's a big investment that teachers need to be consulted on. It just feels like something has been taken away from us.

"Of course, a lot of people are taking it in the negative, but will it be better? But it's hard to think it could be better."

The ATRF currently manages $18 billion in teachers' retirement funds and yielded 9.6 per cent in the 2017-18 fiscal year.

Rod Matheson, CEO of the ATRF, said he was informed of the government's plans when the budget was released on Thursday.

"Our reaction was very much one of surprise. At this point, we're still wanting to understand," he said. "We're trying to learn what it was that went into making this decision. What information and facts were used to come to the conclusion to drive this action?"

AIMCo already administers more than $100 billion in government pensions and other funds.

"My concern is, not that I don't want it to be an Alberta investment, but it was pretty diverse," Martin said. "There were things overseas — good, ethical investments. Will it still be that way?"

In a statement posted on Twitter Saturday, the Alberta Teachers' Association called the move a "hijacking."

"Making this decision without consulting the ATA is extremely disrespectful [to those] who are plan members and owners," ATA president Jason Schilling wrote.

Move was about efficiency, gov't says

In a statement provided to CBC News, a spokesperson for Alberta's Treasury Board and Finance, Jerrica Goodwin, wrote that details around the specific timing of the change would be available when legislation is tabled.

"It is not a requirement to notify the ATRF of this change, and it is proposed until the legislation is tabled and passed," Goodwin wrote.

Goodwin wrote the move of the funds to AIMCo was part of a commitment to make government more efficient.

"[ATRF] assets will be moved under AIMCo so ATRF will have reduced investment management costs and, therefore, higher expected investment returns," she wrote. "Making this change eliminates duplication and reduces the cost of investment services. The ATRF board will remain in place to oversee the pension."

Matheson said the ATRF had not yet received that information from the government.

"To be fair, I have not personally spoken with anyone at the Alberta government myself. I've reached out, and we're going to set up a call and have a discussion," he said. "The focus for us is not about duplication or costs, because we strive for low costs, but much more importantly what we strive for is the best possible net investment returns.

"What we earn on the investments, net of all costs, is really the most important thing. It's not just about costs, it's about the net returns that we earn."

I learned about this yesterday perusing pension news and wasn't surprised Alberta Premier Jason Kenney and his Conservative government are looking to cut costs and have AIMCo manage ATRF's assets.

Let me begin by stating I have nothing against this proposal and think it makes a lot of sense over the long run but the way it was handled was just terrible. This is Canada, not China, you don't rule by dictatorship and some Conservatives never learn and their arrogance will cost them political points in Alberta's next election (just like it cost Stephen Harper during the last federal elections).

Lee Martin and the ATA are right to be angry, there was zero consultation with the teachers on this proposal, it was basically shoved down their throat. Jerrica Goodwin of Alberta's Treasury Board and Finance might be legally right, the government wasn't required to notify ATRF, but it was a bonehead political move not to consult Alberta's teachers first (really dumb, what were they thinking??).

Here is my advice to Jason Kenney and Ms. Goodwin, you should never, ever mess around with teachers' pensions, they will annihilate you. The same thing goes for the broader public-sector, never touch people's pensions without consulting them first.

But as terrible as this process was, there is definitely a lot of logic and common sense in the proposal to have Alberta teachers' pensions managed by AIMCo. Why? Because they not only benefit from economies of scale, they also benefit from investing in private markets all over the world, a huge advantage over the long run.

Now, I don't want to criticize ATRF in any way as this organization has done a great job managing the assets of Alberta's teachers over the long run. Someone from ATRF sent me their 2018 Annual Report which is well worth reading and provides great information.

As you can see below, ATRF's Policy Asset Mix as of August 31st, 2018 (when its fiscal year ends) has a good mix of public and private assets, very much in line with that of its larger peers:

Also, as shown below, ATRF has delivered solid long-term returns, 7.4% net of fees over the last ten years versus 6.9% for its benchmark (as of August 31st, 2018):

Moreover, ATRF is well governed, it's a pension plan which manages assets and liabilities, and it has implemented risk-sharing (post-1992). It manages these assets at a very low cost ($0.17 per every $100 assets).

The funded status of the plans based on the most recent actuarial valuations as at August 31, 2018 is:

So, ATRF has not only delivered the long-term returns, it has also maintained a fully funded status or close to it and that's what ultimately matters to Alberta's teachers.

In terms of compensation, the senior managers at ATRF are compensated well as they have delivered the long-term returns:

Still, they are not compensated as well as their larger Canadian peers and one can argue that they and the managers at Vestcor are underpaid relative to their larger peers.

So far, I've presented a case for ATRF and again, there's a strong case to be made to maintain things as they are.

Now, let me delve into AIMCo's 2018 Annual Report, just to go over some things. The table below shows asset class performance:

As shown, AIMCo's 5-year total fund return is 7.2% vs 6.5% for its benchmark. These are calendar year results as opposed to fiscal year results that ATRF posts (as of end of August).

Unlike ATRF, AIMCo doesn't provide 10-year total fund results relative to benchmark but the results are there over the long run which is why AIMCo's senior managers are paid extremely well, in line with their large Canadian peers:

The senior managers at AIMCo are better paid than those at ATRF but they also manage more assets and that makes their job easier in one sense and more complex in another.

Both organizations are well governed but the biggest difference is ATRF is a pension plan, managing assets and liabilities whereas AIMCo is a pension fund managing assets on behalf of its members who are responsible for their liabilities.

If ATRF's assets are transferred over to AIMCo, it will make it an $130 billion + pension fund and it will still need to manage these assets in the best interests of its members.

This means big cost savings and more importantly, scale to invest directly in private markets all over the world, and that's where AIMCo has a competitive advantage over ATRF.

And this is why I believe this proposal makes sense over the long run even if the government of Alberta bungled up the consultation process.

Sadly, judging by the tweets on Twitter, most of Alberta's teachers don't know much about AIMCo. This isn't entirely their fault and I have spoken to senior members at AIMCo over the years to bolster their communications and do a better job at owning their brand (it's another organization and they need to be a lot more visible if they are to compete on a global scale).

What else? The context of this decision. It seems like Rachel Notley's NDP government meddled way too much in AIMCo's affairs and proposed things that Jason Kenney's government is rightly scrapping (like after three years, some clients of AIMCo had the right to walk away, now they will remain captive to AIMCo which is the right decision).

Let me end by stating that it's only normal that employees at ATRF are rightfully concerned about their jobs. This decision will lead to cost-cutting and duplicate jobs will likely be eliminated but all this remains to be seen because AIMCo is a great organization and I'm sure it can and will absorb many employees from ATRF if this proposal goes through.

It's also worth noting this was the government's proposal, not AIMCo's, and therefore it's up to the government to clarify what it wants to be done and what that means for each organization.

Lastly, I can't help thinking if Doug Ford's Ontario Conservatives are looking at this proposal and thinking of trying the same thing in Ontario, consolidating several large DB pensions. Again, my advice is don't mess with teachers' pensions or other pensions without proper consultations.

I also believe if Ford's government tried the same thing in Ontario, there would be huge pushback as the plans there are larger and more entrenched.

Below, CBC News reports Alberta will cut public sector jobs, end the cap on post-secondary tuition, chop municipal funding and delay infrastructure projects, all with the aim of returning to a balanced budget by 2023.

The Alberta government on Monday introduced two pieces of omnibus legislation containing sweeping changes that include ending a ban on using replacement workers during labour disputes and controlling where in the province doctors can practice.

And lastly, Alberta Premier Jason Kenney has declared that if the Trans Mountain Pipeline is not built by Trudeau’s government, he will hold a referendum on ending equalization payments.

I believe the Trans Mountain Pipeline should be built but Jason Kenney's referendum is another bonehead idea which will backfire on his government and Alberta's citizens. Not too bright.

Update: See my follow up comment on this here.