Fully Funded OPTrust Gains 11.2% in 2019

OPTrust released its 2019 Funded Status Report stating it will lower its discount rate and remains fully funded for the 11th consecutive year:
OPTrust today released its 2019 Funded Status Report, Retirement by Design, which details the Plan’s financial results and fully funded status. Over the past 10 years, OPTrust has achieved an average annual investment return of 8.2 per cent for the total fund, including a return of 11.2 per cent in 2019. The Plan once again lowered its discount rate in order to protect against future market volatility.

OPTrust Select, the new defined benefit pension offering from OPTrust, began enrolling members in 2019. As of December 31, 28 new employers had joined OPTrust Select, representing 930 potential new members to the Plan. OPTrust was also recognized for exceptional service to members in 2019, with members and retirees rating their service satisfaction as 9.2 out of 10, a top-three placement in a global benchmarking survey. CEM Benchmarking also reviewed investment performance and reported that OPTrust investments perform in line with peers with less risk to funded status and at a lower cost, after adjusting for asset mix.

“For OPTrust, Retirement by Design really means two things,” said Lindley. “It’s the way in which we invest for the long-term interests of our members, as well as the increased availability of defined benefit pensions through the launch of OPTrust Select. This offering is designed specifically for the nonprofit, charitable and broader public sectors — groups that have not traditionally had access to the security and stability of defined benefit pensions.”

OPTrust continued to strengthen actuarial assumptions in 2019 to enhance the long-term funding health of the Plan. The Plan’s real discount rate was lowered to 3.1%, net of inflation, from 3.15% in 2018. OPTrust continued to report in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), having become one of the first plans to do so in 2017. More detailed information about OPTrust's 2019 strategy and results is available in Retirement by Design.


With net assets of almost $22 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan (including OPTrust Select), a defined benefit plan with over 96,000 members. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.
Take the time to read OPTrust's 2019 Funded Status Report here. I will be referring to this report below.

This morning, I had a chance to briefly talk to OPTrust's CEO, Peter Lindley. It's not the first time I chatted with Peter (see here for an earlier conversation) but given the chaotic markets, I do appreciate that he took some time to go over main points in this report. I'd also like to thank Claire Prashaw and Jason White of OPTrust's Communications team for setting up a call.

Peter and I began by discussing why OPTrust lowered its real and nominal discount rate. He stressed two reasons:
  1. Expected returns are going to be a lot lower going forward
  2. OPTrust is a mature pension plan and to maintain its fully funded status, it needs to be very conservative with its discount rate.
On the first point, obviously people are going to think of what's going on in the stock market today but I caution you, when thinking of expected returns, look at where the current 10-year US Treasury yield stands, at a record low of 0.5%.

Admittedly, that rate is extremely low now given what's going on in the world, but when thinking about future expected returns, you always need to start with the yield on the 10-year US Treasury note to anchor your expected returns for all asset classes.

Second, as shown below, OPTrust is a mature pension plan with almost as many active members as retired members:

What this means is that OPTrust cannot take the risks of a much younger plan because it needs to ensure its funded status is sustainable over the long run to pay pensions of its retired members.

I did discuss something with Peter Lindley, namely, that unlike HOOPP, OTPP and CAAT Pension, OPTrust and OMERS have yet to adopt conditional inflation protection and still guarantee full inflation indexing (full cost of living adjustment).

Peter told me that these decisions are taken by the sponsors and OPTrust can only "educate" them. He said right now, there's no pressing need to adopt conditional inflation protection but if the funded status were to deteriorate significantly in the future, they might need to revisit this as conditional inflation protection "offers an important lever" to address a pension shortfall.

In terms of OPTrust Select, however, he told me that conditional inflation protection is part of the package and this ensures they can broaden DB pensions to the broader non-profit sector in Ontario all while ensuring it will not jeopardize the sustainability of the plan for current members over the long run.

As of the end of December, 28 new employers have joined OPTrust Select, representing approximately 930 potential new members.

Peter told me there are roughly a million employees in Ontario's non-profit sector and the Ontario Nonprofit Network has been a staunch supporter of OPTrust Select and they expect more new members in the coming year.

[Note: Unlike CAAT's DB Plus, OPTrust Select does not incorporate existing pension plans from all over the country, including potential corporate DB plans. Right now, it is offered to employers in Ontario's non-profit sector and broader public sector.]

I asked Peter what are his top priorities going forward and he told me there are two:
  1. Sustainability (responsible investing)
  2. Extending DB pensions to Ontarians looking for a safe, secure retirement
On sustainability, he mentioned  that roughly 18% of OPTrust's Infrastructure portfolio is in renewables now, something which "was started years ago".

He also mentioned Alison Loat, who recently joined OPTrust as Managing Director, Sustainable Investing and Innovation.

In a recent article in the Canadian Investment Review,  Ms. Loat said the capital allocation strategy will focus on some of the longer-term risks and opportunities that could affect the sustainability of the plan that its current investment teams aren’t looking at for different reasons:
“We’re just in the process now of determining that strategy and starting to socialize it.”

Climate change will likely be the first area of focus for the investment strategy, adds Loat.

The specific amount of the pool of capital to be allocated to the team is yet to be determined, but it will come from the OPTrust’s incubation portfolio — a pre-existing pool of assets equal to 1.5 per cent of the pension fund’s total assets that’s available to the various investment teams to incubate new ideas.

“I think the main thing for us at this time is to really look at areas that we can be complimentary to our existing teams,” says Loat. “So we might be able to look at things that other teams can’t or won’t or don’t, for the reasons that they’ve got certain expectations around . . . risk bands and so some things naturally fall out of that.”

While still early days, a hypothetical example of what this could be is that the real estate team might find an interesting service that makes buildings more sustainable. “Now they don’t invest in that, but that might make sense for us to invest in.”

Although the term impact investing is used broadly in the industry, Loat doesn’t call the capital allocation strategy an impact investing strategy. The team will focus on sustainability, but the strategy is returns-focused first, given the fiduciary duty of the OPTrust as a pension plan. “But obviously, we are very mindful that it is really important that what we invest [in] does contribute positively to the world we live in.”

Also, the team isn’t restricted to a specific asset class, but Loat highlights it will aim to complement, instead of duplicate, existing activities. “So we wouldn’t be purchasing real estate assets, for example, because we have a team that does that.”

The team is currently comprised of four people: Loat, a portfolio manager, an analyst and an operations manager. It will also be hiring an associate portfolio manager and another analyst.
In a previous conversation, Peter told me Ms. Loat will be looking at "innovation" in the energy sector (not broader innovation).

What else did I discuss with Peter Lindley? I asked him how come OPTrust doesn't provide returns by asset class and benchmark returns for each portfolio and the overall fund and he told me "benchmarks are not specific" especially in private markets and they prefer to "focus on the overall funded status".

I would refer my readers to pages 26-30 of the 2019 Funded Status Report to gain a bit more information on OPTrust's broad asset classes and how each performed. Below, I give you a snapshot of the weightings:

A few observations:
  • OPTrust allocates more into Private Equity (12.9%) than Public Equity (11.3%)
  • There is a significant allocation to "market neutral and multi-asset strategies" (20%)
  • The weightings in Real Estate (14.3%) and Infrastructure (11.1%) are also significant
  • Taken together the weighting in Private Markets and Hedge Fund Strategies make up roughly 56% of total assets, which is significant, and Fixed Income makes up 37% to hedge liabilities.
  • In other words, there isn't much public market beta in OPTrust's portfolio, at least not when I look at the overall asset mix.
  • While public equity exposure delivered a net return of 23.2% last year, the private equity portfolio generated a net return of 24.7% in 2019.
  • The real estate portfolio generated a net return of 5.2% last year while the infrastructure portfolio generated a net return of 12.8% in 2019.
  • Credit strategies earned net returns of 13.4% while market neutral strategies generated a net return of 2.2% in 2019.
  • The Risk Mitigation Portfolio holds US Treasuries, safe-haven currencies and gold and earned a net return of 5.4% last year.
  • The Funding Portfolio includes exposures such as bond repurchase agreements, implied funding from our derivative positions, and liquidity reserves. The -16.9% weight of the Funding Portfolio reflects OPTrust’s overall balance sheet leverage.
Lastly, Peter Lindley emphasized how proud he was in terms of member service, placing top three in the CEM global ranking of service and top two among Canadian peers.

In a previous comment of mine, I outlined how OPTrust bolstered its senior leadership team, and how Mr. Lindley placed 50% women in his senior team, and I commend him for this.

Yesterday was International Women's Day and we still have years to go before gender equality is reached, so I like seeing Canada's large pensions taking the lead on gender equality and diversity and inclusion.

Let me be blunt here: When it comes to diversity and inclusion for women, people with disabilities and other minorities, talk is cheap, I like seeing action and real progress. We are nowhere near to where we should be.

Anyway, I will end it there. Once again, I thank Peter Lindley for taking the time to talk to me earlier today and invite my readers to read OPTrust's 2019 Funded Status Report here.

Below, OPTrust's CEO, Peter Lindley, discusses how at OPTrust, retirement by design really means two things. "The first is the way in which we invest for the long term and in the best interests of our members. The second thing we mean is how we increase availability of defined benefit pensions through the launch of OPTrust Select which was designed for the broader public and nonprofit sector".

Second, Cathy Taylor of the Ontario Nonprofit Network discusses why they are pleased to be partnering with the nonprofit and charitable sectors in pursuit of broadening defined benefit coverage in Ontario and why they chose OPTrust Select.