pensions seminar presentation to 1818 society staff...
TRANSCRIPT
Pensions Seminar Presentation to 1818 Society
Staff Retirement Plan
– November 1, 2012 –
Highlights
2
Secure Benefits
Good Funding Position
Strong Performance
• Assets held in legal trust, contributions irrevocable, accrued entitlements protected by Plan Document
• Strong and committed sponsor
• PBO Funded Ratio – 89% (as of June 2012) despite historically low real interest rates
• Broadly composed Pension Finance Committee, with knowledgeable and experienced members
• Transparent reporting and extensive disclosure
• Long-term performance in excess of 3.5% real target
• Top quartile 1yr and 5yr performance vs. industry universe
Cost-effective Implementation
• Investment costs have fallen significantly in recent years
• Eliminated high cost/low value added activities
Robust Governance
Long-term performance
3
1.8
4.4
5.4
5.9
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
6.0
6.5
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 June
U.S
. $
U.S. CPI Traditional Portfolio Return (60/40 Stocks/Bonds) Actual Return (Net of Fees) Actual Return (Gross of Fees)
Cumulative Dollar Value Growth(1990-2012 June)
5 Years 10 Years 15 Years 20 Years
Nominal 3.3% 7.3% 6.3% 8.2%
Real 1.3% 4.7% 3.8% 5.6%
Rolling Investment Return (Annualized) over
Industry Performance References As of June 2012
4
*Hypothetical portfolio consisting of 60% Equity (50% MSCI World ex US - Unhedged and 50% Russell 3000) and 40% FI (Barclays Global Aggregate - Hedged)
** Based on Wilshire Associates Trust Universe Comparison Service (TUCS): Broad universe of corporate and public pension plans, foundations and university
endowments with more than 1 billion USD assets under management
*** Risk Efficiency – Return in excess of cash, per unit of risk (Sharpe Ratio). Higher numbers indicate a more efficient use of the risk taken
**** Data collected from the Annual Reports of the respective institutions
1Y 5Y 10Y 5Y 10Y
SRP Portfolio 4.5 3.3 7.3 0.34 0.79
Traditional 60/40 portfolio* -0.1 1.4 6.0 0.03 0.39
Industry** - Median 1.8 1.9 6.9
Top Quartile 3.9 3.0 7.6
Bottom Quartile 0.6 1.2 6.3
Pension Plans****
CalPERS 1.0 -0.1 6.2
CalSTRS 1.8 0.3 6.5
University Endowments****
Yale 4.7 1.8 10.6
Harvard -0.1 1.2 9.5
Univ. of Pennsylvania 1.6 2.0 7.1
Stanford 1.0 2.2 n.a.
As of Jun 2012Annual Return - (Absolute), % Risk Efficiency***
Highlights
5
Secure Benefits
Good Funding Position
Strong Performance
• Assets held in legal trust, contributions irrevocable, accrued entitlements protected by Plan Document
• Strong and committed sponsor
• PBO Funded Ratio – 89% (as of June 2012) despite historically low real interest rates
• Broadly composed Pension Finance Committee, with knowledgeable and experienced members
• Transparent reporting and extensive disclosure
• Long-term performance in excess of 3.5% real target
• Top quartile 1yr and 5yr performance vs. industry universe
Cost-effective Implementation
• Investment costs have fallen significantly in recent years
• Eliminated high cost/low value added activities
Robust Governance
Funding Position & Bank Contributions
As of June 30, the SRP PBO Funding Ratio was estimated to be 89%, as real interest rates reached secular lows
The PFC approved a pension contribution rate of 24.2% of net salaries for FY2013. Outlook is for the contribution rate to rise over the next year then stabilize around 27% of net salaries.
Source: Milliman 2011 Pension Funding Study and Public Fund Survey sponsored by the
National Association of State Retirement Administrators
(PBO Funding status estimated for public sector to provide consistent comparison)
6
0%
5%
10%
15%
20%
25%
30%
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Fiscal Year ending June 30
Pension Contribution Rates - History and Projection
Staff Retirement Plan Tax Supplement Account Supplemental Staff Retirement Plan
Actual Projected
0
5
10
15
20
25
30
35
<30% 30%-40% 40%-50% 50%-60% 60%-70% 70%-80% 80%-90% 90%-100% >100%
Estimated Funding Ratio
Distribution of US Public Sector Pension Funding Ratios - December 2011
Average USPrivate Sector
79%
SRP - 90%
Governance – Recent developments
7
•Broadened participation on PFC. Many members have significant market knowledge and experience outside the Bank
•Facilitated interactions of PFC members with industry experts (IPC, ICPM)
•Treasurer formed Expert Advisory Council (EAC) . Several members have extensive multi-asset class experience
•PFC currently considering further external input
•Satisfactory outcome of IAD Review of Plan governance and management
•Staff continuously in contact with markets
• Increased engagement with the 1818 Society around the Annual Meeting
•Enhanced the Annual Report
•Work on-going to develop a Pension website
•Extensive disclosure with respect to funding methodology, funding ratio determination, investment strategy and cost structure
External Input
Communication &
Transparency
Risk Tolerance
Desired tradeoff between risk, investment returns and
contributions
Investment Beliefs
•Liabilities explicitly considered when defining investment policy
•Diversification improves risk/return profile
•Illiquidity risk is rewarded
• Strategy based on forward-looking assumptions
•SAA is a very important decision affecting long-term performance
Investment Policy
PFC – Responsible for Financial Management
Objective: Fund the benefits through a combination of investment returns and contributions
Investment Framework
The asset allocation and the
associated cost structure is the
result of a series of
interconnected decisions taken
at different steps in the process
Decisions on Risk Tolerance and
Investment Beliefs have
significant downstream
implications for:
The Asset-Liability
Management framework
The range of asset classes
The risk profile of the Plan
8
Funding Policy
Asset Allocation Implementation Cost Structure
Asset Allocation
Diversified asset allocation with exposure to assets that are expected to perform in different economic environments
Large allocation to liability hedging assets (US TIPS) and nominal bonds results in a lower risk profile for the SRP compared to many other institutions
Significant allocation to alternatives (e.g. private equity, real assets, absolute return)
9
Target Strategic Asset Allocation Current Asset Allocation Cash, 2%
Nominal Bonds, 9%
US TIPS, 20%
Developed Equities,
16%EM Equities, 11%
Private Equity, 15%
Real Assets, 12%
Absolute Return, 15%
Cash, 2%
Nominal Bonds, 12%
US TIPS, 20%
Developed Equities,
15%
EM Equities,
9%
Private Equity, 20%
Real Assets, 12%
Absolute Return,
10%
• Staffing and the resulting cost structure dependent on the SAA, the allocation to alternatives and on implementation choices (e.g. active vs. passive mandates, internal vs. external management)
• Extensive deliberations with the PFC during the mid-term and annual budget exercise.
Investment Management Costs
10
• Fees continued to decline over the last four years as a result of management’s focus on implementation efficiency
• Extensive efforts to report all investment management fees paid to managers vs. many organizations who report only direct management fees which are substantially less than total management fees
Plan Cost Structure Driven by Decisions Made Upstream
Sharp Focus on Measuring All Investment Costs
SRP Investment Management Fees Have Dropped in Recent
Years
• The number of investment staff per $1 billion of assets under management is in line with industry
• Staff costs related to financial management are about 5 basis points (0.05%) of Plan assets
Staffing Levels in Line with Industry Averages
The PFC seeks value not just cost minimization
Investment Management Costs (2)
Investment management costs have declined in recent years in dollars terms and basis points, due to targeted management decisions such as:
Eliminated high-cost, low value-add activities
Negotiated fee reductions in both public and private asset classes
Kept allocation to hedge funds below target as portfolio is restructured
Introduced passive mandates in some portfolios as appropriate
11
Evolution of Investment Management Fees
134
126
119
115
109
92
82
76
20
40
60
80
100
120
100
110
120
130
140
150
2009 2010 2011 2012*B
asis
po
ints
(b
ps)
Mln
. U
SD
Year
Management Fees (mln.USD) - LHS
Management Fees (bps) - RHS
• 2012 Management Fees represents a proxy estimated based on 2012 YTD actual fees in public asset classes annualized and 2011 actual fees for private asset classes.
• Basis points figures derived based on average net AUM for each year.
Going Forward
Market environment
Still navigating through a low growth and low inflation environment in many
countries
Interest rates at secular lows in developed world raises significant concerns for the
outlook for fixed income returns
Market preference is continuing to change rapidly between risk-seeking and risk-
aversion, depending on actions by global monetary authorities
Portfolio Management/Actions
Continuing to maintain the allocation to Private Equity by committing significant resources and assets each year
Broadening and growing investments in Real Assets
Actively looking at investment alternatives for parts of the fixed income portfolio
Undertaking a restructuring process of the Absolute Return portfolio
Introducing passive mandates in different portfolios as appropriate 12
Summary
13
Secure Benefits
Good Funding Position
Strong Performance
• Assets held in legal trust, contributions irrevocable, accrued entitlements protected by Plan Document
• Strong and committed sponsor
• PBO Funded Ratio – 89% (as of June 2012) despite historically low real interest rates
• Broadly composed Pension Finance Committee, with knowledgeable and experienced members
• Transparent reporting and extensive disclosure
• Long-term performance in excess of 3.5% real target
• Top quartile 1yr and 5yr performance vs. industry universe
Cost-effective Implementation
• Investment costs have fallen significantly in recent years
• Eliminated high cost/low value added activities
Robust Governance
Industry Performance References As of December 2011
15
*Hypothetical portfolio consisting of 60% Equity (50% MSCI World ex US - Unhedged and 50% Russell 3000) and 40% FI (Barclays Global Aggregate - Hedged)
** Based on Wilshire Associates Trust Universe Comparison Service (TUCS): Broad universe of corporate and public pension plans, foundations and university
endowments with more than 1 billion USD assets under management
*** Risk Efficiency – Return in excess of cash, per unit of risk (Sharpe Ratio). Higher numbers indicate a more efficient use of the risk taken
**** Source: Charles Skorina Report from September 2012
1Y 5Y 10Y 5Y 10Y
WB SRP Portfolio 4.6 3.7 6.3 0.37 0.65
Traditional 60/40 portfolio* -0.9 1.5 5.1 0.00 0.31
Industry** - Median 1.6 2.1 5.8
Top Quartile 3.9 3.2 6.5
Bottom Quartile 0.3 1.5 5.1
Pension Plans****
Boeing 6.3 0.41
AT&T 5.4 0.39
Ontario Teachers Pension Plan 4.2 0.22
IBM 3.8 0.22
Exxon Mobil 2.6 0.07
Verizon 2.5 0.07
Public Employee Retirement Syst of Ohio 1.6 0.01
Bank of America 1.1 -0.01
Caisse de Depot Montreal 0.6 -0.05
CalPERS 0.5 -0.05
GE 0.4 -0.05
Annual Return - (Absolute), % Risk Efficiency***As of Dec 2011