OPTrust Loses 2.2% in 2022, Remains Fully Funded

Today, OPTrust released its 2022 Funded Status Report stating it is fully funded for a 14th consecutive year:

OPTrust today released its 2022 Funded Status Report, A Clear Vision, which details the Plan's financial results and fully funded status. In one of the most challenging years for markets in decades, OPTrust achieved a net investment return of -2.2 per cent and remained fully funded for the 14th consecutive year. Over the past 10 years, the Plan's average net investment return is 7.8 per cent.

Our long-term investment horizon means we are well positioned to navigate short-term volatility and instability as we continue to capitalize on long-term trends and opportunities, and most importantly, deliver a secure retirement to our members," said Peter Lindley, President and CEO of OPTrust. "Our ability to weather a turbulent global economy and maintain our fully funded status reflects our exceptional team and their extraordinary commitment to our more than 100,000 members."

As a component of OPTrust's Member-Driven Investing strategy, bonds play an important role in keeping the funded status stable through market cycles. While bonds delivered negative returns in 2022, the increase in interest rates has a positive impact on longer-term Plan sustainability. In 2022, illiquid asset classes performed well and helped to offset total portfolio losses from public market assets, reflecting the value of diversification in the portfolio. The infrastructure, real estate and private equity portfolios delivered net returns of 21.1 per cent, 15.0 per cent and 4.8 per cent, respectively.

Our members look to OPTrust for a predictable income in retirement and the peace of mind that comes with a defined benefit pension," said Lindley. "OPTrust's Member-Driven Investing strategy and diversified portfolio helped to preserve the funded status for a 14th consecutive year, despite the difficult market environment in 2022. The good news for our members is that the Plan has never been more sustainable than it is now."

In 2022, OPTrust also welcomed ten additional nonprofit organizations to reach a membership of 3,200 in OPTrust Select, implemented the first year of a three-year inclusion, diversity and equity strategy, resulting in a 9 per cent increase in gender equity at OPTrust, and continued to provide an exceptional service experience to members who rated their service satisfaction as 8.7 out of 10. OPTrust was also recognized among the top 10 pension plans in the world for service by CEM Benchmarking Inc.

In recognition of members' growing interest in environmental, social and governance (ESG) matters and the role of responsible investing at OPTrust, the annual Responsible Investing Report is now integrated into the Funded Status Report. Responsible investing highlights of the past year include engaging over 500 companies on key ESG issues, the release of OPTrust's enhanced climate change strategy and announcing the ambition to achieve a net-zero portfolio by 2050.

"OPTrust has a long-standing commitment to integrating ESG factors in our investments and investing sustainably for the long-term health of the Plan is foundational to our vision," said Lindley. "As the world accelerates the transition to a low-carbon economy, our enhanced climate change strategy is designed to support the fund's resiliency and adaptability on the path to net zero."

In 2022, OPTrust increased the discount rate to 3.0%, net of inflation, from 2.85% in 2021. Additional information about OPTrust's 2022 strategy and results is available in A Clear Vision at optrust.com.


With net assets of almost $25 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 106,000 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.

Earlier today, I had a chance to speak with OPTrust President and CEO Peter Lindley going over their 2022 results and more on the funded status of the plan.

I want to thank Peter for taking 30 minutes to talk to me as well as Claire Prashaw and Jason White for setting up the Teams meeting and providing me with information beforehand.

I recommend you take the time to read about OPTrust's 2022 strategy and results is available in A Clear Vision at optrust.com.

Before I get to my discussion with Peter, some highlights from the report and more:

Plan Sustainability

The Plan is sustainable if it continues to deliver a valuable benefit within an acceptable range of contributions in the short, medium and long terms. That means members' contribution levels will remain relatively steady through the years they are making those contributions to the Plan, and they will be paid their pensions when they retire. As of December 31, 2022, the Plan has been fully funded for 14 consecutive years, yet ongoing challenges remain, including: the investment environment, high inflation, plan maturity and longevity risk.

Under the primary schedule, pensions that are being paid and deferred pensions are granted automatic annual cost-of-living adjustments (COLA) based on inflation. Under OPTrust Select, on an annual basis at the discretion of the Board, pensions that are being paid may be granted COLA, and active members may be granted accrued benefit upgrades to adjust for inflation. The inflation assumption used for Plan valuations is based on long-term expectations. If the actual rate granted to members for COLA and benefit upgrades is higher than the Plan's assumption, an experience liability loss occurs, and vice versa. In 2022, we saw inflation rates rise to their highest levels in almost 40 years. As a result, we have adjusted our COLA assumption for the 2022 valuation to incorporate what we expect to be short-term increases in inflation.

The investment environment continues to be tumultuous with a challenging macroeconomic and market environment. We note that a sustained period of high inflation with low economic growth will put pressure on the Plan's funded status.

The demographics of the Plan are challenging because the proportion of inactive members relative to active contributing members remains high. This situation means funding risk is borne by a smaller group of contributing members, which constrains the amount of risk the Plan can bear.

There are several methods to help maintain the funded status: our Member-Driven Investing (MDI) strategy, the risk tolerance specified in our Risk Appetite Statement and our funding tools. As challenges continue for longer periods of time, the tools at our disposal are applied differently. This includes the way we use risk within the MDI strategy. Plan sustainability is directly influenced by how we manage challenges and the amount of risk we are willing to assume. For instance, the discount rate includes a margin to protect the Plan from future adverse events. The level of margin in our discount rate at the end of 2022 has increased. The significant rise in yields during 2022 has reduced the strain on the discount rate used to value the Plan's obligations.

In 2022, we conducted an experience study to review the Plan's demographic assumptions. This is another tool we employ to help maintain our funded status by ensuring our valuation assumptions remain appropriate. Based on the results of the study and expectations of future trends, several of the demographic assumptions have been updated including retirement and termination rates. The main findings of the study revealed that there is a higher incidence of termination for younger members and that members are generally delaying their retirement. In addition, we are always looking into the future so we can attempt to foresee any upcoming challenges that could potentially affect our sustainability. We perform projections under varying economic environments, such as high inflation and low economic growth, or market collapses and rebounds, to help prepare for outcomes that may affect the level of future contributions and/or benefits.

Funding pensions

The pension commitment spans many decades. In keeping with that long-term time horizon, short-term market events, whether positive or negative, should not lead to contribution and/or benefit changes. Contributions and/or benefits should only be changed when economic conditions or member demographics and/or behaviours change the long-term expected cost of the benefit. In setting the funding policy, we seek to maintain a balance between four different goals: benefit security, contribution rate stability, fairness between the two schedules of benefits and intergenerational equity. Intergenerational equity means that every generation of members will pay a fair amount for the benefits they receive — not that every generation should pay the same contributions for the same benefit. Of all these goals, the security of accrued benefits is the most important, which is why we strive to keep our commitment to members that they will receive their accrued benefits.

The funding valuation is used to determine the adequacy of the contribution rate and the funded position of the Plan and is filed with regulators at least once every three years, as per regulatory requirements. The financial statements valuation is used for disclosure for the purpose of this report. Both actuarial valuations require many different assumptions about future economic conditions and events. "Best estimate” assumptions are unbiased and are based on Plan experience and the consideration of potential future outcomes.

Funding Valuations

A funding valuation presents the Plan's financial information in a manner approved by OPTrust's Board of Trustees and in accordance with standards and regulations. It determines whether the Plan's assets, together with expected investment income and projected future contributions in respect of current members, are sufficient to fund members' expected benefits. This valuation approach is known as the modified aggregate method. It identifies any gains and losses that have occurred since the last funding valuation and confirms the overall contribution requirements until the next valuation. The funding valuation uses best estimate assumptions with the exception of the discount rate, which includes a margin of conservatism, which helps the Plan meet its funding goals.

Financial Statement Valuations

OPTrust's financial statements rely on an actuarial valuation prepared in accordance with Canadian accounting standards for pension plans. The financial statements valuation is prepared using our best estimate assumptions. The valuation recognizes the increase in value of future obligations over time, and pension-related receipts and disbursements. Experience gains or losses (i.e. when actual experience differs from what we assumed) are recognized in the year incurred.

2022 Funding Valuation 

OPTrust engages independent actuaries to perform regular valuations of the Plan to ensure there are enough assets to meet the projected cost of members' lifetime pensions. OPTrust's 2022 valuation shows the Plan remained fully funded as of December 31, 2022. The funding valuation also showed deferred (or smoothed) investment gains of $349 million, which will be recognized over the next four years, further supporting the Plan's funded status in the years to come. The Plan's real discount rate for the 2022 funding valuation was increased to 3.00 per cent, net of inflation, up from 2.85 per cent in 2021. The effect of this change decreased the total fund liabilities by $709 million. The effect of the change in the COLA assumption increased the total fund liabilities by $615 million, and the effect of changes to the demographic assumptions based on the experience study performed in 2022 decreased the total fund liabilities by $194 million. Changes in the Plan's actuarial assumptions can have a major impact on the projected cost of members' pensions and the Plan's funded status. The table shows the impact of a 0.5 per cent change in certain key assumptions on the Plan's funded status.

See more highlights here.

Discussion with Peter Lindley

Peter began by giving me the the overview stating that even though they weren't pleased with the negative 2.2% last year, the plan remains fully funded and that is their definition of success.

Moreover, the long-term return remains solid.As stated above, over the past 10 years, the Plan's average net investment return is 7.8%.

He told me last year was difficult in public markets as both stocks and bonds got hit at the same time, which is rare.

He also said they are a mature pension fund with more money coming out than they have coming in so they need to be very aware of their risk. 

One of the ways they do this is by looking at their liabilities and interest rates can go up as well as down, so they se long bonds as part of their liability hedging portfolio:

A major contributor to our negative return last year was our bond portfolio to hedge our liabilities. That is 30% of portfolio which is hedged. The good news is more than 2/3 of our portfolio isn't hedged so higher interest rates mean our liabilities decreased more than we lost on our assets.

Peter told me that like OTPP, OMERS and HOOPP, they have inflation protection but they do not have conditional inflation protection, it's guaranteed inflation protection:

It certainly factors into our investment strategy so we investments that have some sensitivity to inflation -- we have a fairly large allocation and parts of the real estate market which have pricing power as it relates to inflation. That kind of inflation protection is completely out of our control, it's our sponsors' decision in terms of whether they want to adopt conditional inflation protection.

I then asked him about the performance in private markets as I understand the performance in public markets very well:

The infrastructure, real estate and private equity portfolios delivered net returns of 21.1%, 15% and 4.8%, respectively. As I just mentioned, Infrastructure and Real Estate do have some inflation protection built into them, so that is one of the benefits of having a diversified portfolio in total but also in our private assets as well. If we continue seeing inflation, we'd expect those asset classes will continue to outperform relatively speaking. You are right to mention there is a valuation lag in private markets, there's also a lot of money flowing into these assets. What has changed in all these assets in 2022 is the cost of funding has gone up and access to funding has subsequently gone down. It makes these markets more challenging for any investor using external financing. One of the advantages at our Plan is we typically use less leverage in our direct investments and that has always been our strategy even when funding costs were low.This lower leverage will work well for us going forward as interest rates remain high.

I told Peter a lot of OPTrust's peers are heavily invested in private debt, some knowing very well the loans they are underwriting, others a lot less well relying on funds and external parties.

Peter told me they have no allocation to private debt but they are able to do some debt internally in some assets but it's very small. He added: 

I would agree with you, if you don't know what you own, private debt or anything else, that's very risky. Those of us who were around during the GFC know this all too well, if you're relying on a third party to do your credit rating or anything else, you're in trouble.

I asked him about Private Equity which had stellar returns in 2021, gaining 55%, returning 4.8% last year:

Long-term expected returns for PE are certainly above 4.8% which they returned this year and long-term returns are well above that. Sandra and Gavin are co-heads of Private Markets and are returning the long-term returns the Plan needs.

He told me he's very aware that when you have benchmarks it can lead to unintended consequences and their fiduciary duty is toward members and so they adopt a total Plan approach, focusing on funded status first and foremost.

He said they maintain a focus on funding and typically will do large asset allocation decisions on liquid markets where it is easier to make changes but typically don't try to predict future which they think is impossible.

I disagreed stating at major inflection points, it's much easier predicting the future. All they need to do is subscribe to Trahan Macro Research like top investors do and read yours truly.

Importantly, we are heading into a major global economic recession/ depression and this will become evident in the second half of the year as employment losses pick up significantly.

Peter told me they he has confidence in his investment team and that they are building a sustainable and resilient portfolio, which they are doing.

As far as membership, OPTrust is getting new members, with record number of new members to OPTrust Select. Peter told me they are particularly proud of helping non-profit organizations in Ontario which are made up mostly of women.

I want to give a shout here to Jason White for his work in attracting new members to OPTrust Select.

Lastly, peter and I had had a conversation on diversity, equity & inclusion and how more needs to be done to incorporate people with mental and physical disabilities in the workplace.

We both agreed that these people are under-represented in the workforce and that people with mental illness are especially not well represented and have suffered during the pandemic.

Peter suggested I talk with his new Director of Diversity, Equity and Inclusion to gain more insights on this important issue.

As I said, it's not not just about bringing people with disabilities in to discuss these issues during People with Disabilities Day, it's about integrating these people, not pitying them, but recognizing the true added value they bring to your organization.

Peter agreed, saying it's not only the right thing to do for society, it;s the right thing to do for the organization as well.

At this point, Peter had to go to as I did because I'm doing decompression therapy for my sciatica and I did an epidural yesterday as I was suffering from intolerable pain over the weekend (this sciatica bout is torture, waiting to see a neurosurgeon as I have a bad rupture on L3/L4 impinging my nerve). 

I recommend you all take the time to read OPTrust 2022 Funded Status Report here honing in on pages 24-32 where you will get a lot more details on where they made and lost money last year:

I did note this on their multi-strategy investments which I didn't discuss with Peter:

Our multi-strategy investments consist of a wide range of liquid alternative strategies that allow us to diversify the total portfolio, while accessing value-add opportunities as well as a broad and differentiated set of risk premia. These strategies, which can be more complex and dynamic in nature, generally increase the resilience of the total fund portfolio.

Multi-strategy investments generated a net return of -1.4 per cent in 2022, down from 2021, but a strong result relative to the -5.8 per cent return delivered by a diversified mix of hedge fund strategies represented within a broad hedge fund index. In general, the more traditional risk premia-oriented strategies were challenged, given their exposures to equities and fixed income. However, other strategies in our portfolio such as quantitative market-neutral hedge fund strategies, alternative risk premia strategies and macro-oriented and trend-following strategies contributed positively to performance

All I told Peter is with rates up significantly, make sure you're not paying 2 & 20 to hedge funds hiding in cash, and that T-bills + 300 basis points bogey has gone up significantly. 

I think it's wrong to compare yourself to a group of hedge funds that lost money last year, it should be focused on elite hedge funds that made money and if you can't get into them, don't bother going external, talk to me and do it all the absolute liquid alternative strategies internally.

I can bring real experts to OPTrust to do this internally, saving the organization a ton on fees and building internal capabilities which can be transferred down from generation to generation.

Lastly, I note this on executive compensation:

I am surprised that Sandra Bosela, Co-Group Head, Managing Director and Global Head of Private Equity at OPTrust Private Markets Group and Gavin Ingram's total compensation is not publicly disclosed in the Annual Report since they make more than Peter and James who is their boss.

This is a huge mistake and in the spirit of full transparency, I would ask OPTrust publishes their compensation going back several years.

I also note Sandra who is highly qualified and super nice is a board member of BDC, and I have been very critical of this organization where I worked in the past on my blog. 

I'm not faulting Sandra or BDC's board which is politically appointed as is BDC's leader but what the hell is going on there? This seems like a puppet board which does noting but oversee the government's agenda. It's really too bad because we are heading into a major recession and BDC needs to step up to the plate.

Below, John Ruffolo, Founder and Managing Partner at Maverix, talks with the Financial Post’s Larysa Harapyn about the story behind the Silicon Valley Bank collapse.

Also, Mohamed El-Erian, Allianz and Gramercy advisor and president of Queens' College, Cambridge, joins 'Squawk Box' to discuss his thoughts on the backstop provided to SVB, if other banks will have similar issues as SVB, and much more. 

Third, Danny Moses, Moses Ventures founder, on the banks, the Fed and whether you can trust this regional bank rebound. With CNBC's Melissa Lee and the Fast Money traders, Karen Finerman, Tim Seymour, Guy Adami and Courtney Garcia. 

Fourth, Steve Forbes explains why more trouble is coming following the collapse of SVB and Signature Bank, and who's actually at fault for the bad times now roiling the banking sector. 

Fifth, Dave McCormick, former CEO of Bridgewater Associates, joins 'Squawk Box' to discuss his thoughts on the SVB collapse, the government response to the collapse, and how to roll back the precedence created in this incident. 

Lastly, Mark Zandi of Moody's Analytics with a deep dive look inside inflation. With CNBC's Melissa Lee and the Fast Money traders, Karen Finerman, Tim Seymour, Guy Adami and Courtney Garcia. 

Zandi thinks the Fed should pause here but I disagree with him as inflation remains historically high and labor markets very tight.  

Importantly, I think the Fed should go 50 basis points at its next two meetings (next week and in May) before pausing because it's easier to cut rates if something blow up then raising them again in six months if wage inflation picks up significantly. 

I remain very bearish on markets and think we are only entering the brutal period of the bear market.