Against the tide: 2 Ontario funds launch DB plans

Two Toronto-based public pension funds have become disrupters in the retirement world by taking a page from the past: developing new defined benefit plans at a time when closing or freezing plans has become the norm.

The plans — the C$20.3 billion ($16.1 billion) Ontario Public Service Employees Union Pension Plan, managed by OPTrust, and the C$10.8 billion Colleges of Applied Arts and Technology Pension Plan — this spring introduced new defined benefit plans for employers that do not offer retirement plans, handling all investment and administrative duties.

The view of Toronto as a retirement disrupter doesn't come from within the city but from outside, said Hugh O'Reilly, president and CEO of OPTrust, relaying how a U.S. pension fund executive once described Toronto as the Silicon Valley of retirement plan development.

"Here's what's interesting about Toronto," said Mr. O'Reilly, a vocal proponent of DB plans. "We all believe the jointly sponsored pension plan, similar to U.S. public pension plans, is the highest form of delivering defined benefits and successfully developing expertise." He said the evidence is in the amount of internal asset management done by OPTrust, as well as the Toronto-based C$189.5 billion Ontario Teachers' Pension Plan, the C$95 billion Ontario Municipal Employees' Retirement System and the C$77.8 billion Healthcare of Ontario Pension Plan. OPTrust manages 70% of the OPSEU pension plan internally, while the other plans manage most if not all of their assets with internally based management teams.

The CAAT and OPTrust effort is an example of how the Canadian model of public defined benefit plans — well-funded plans with good governance and collaboration among all stakeholders — works, added Ron Mock, president, CEO and interim chief investment officer of Ontario Teachers. "The success of the Canadian model, so to speak, a model that was pioneered by (Ontario) Teachers early on, still has a lot of believers up here in Canada," Mr. Mock said.

"The fact that people like us are fully funded, even with the changing demographic and mortality process that's going on, maybe underscores that point," he added. "The starting of DB plans by these other groups are a great idea. I believe strongly in DB plans, or evolved or modified DB plans. And I think this service can be afforded by smart groups of people — and both CAAT and OPTrust are good groups of people to offer this out."

Mr. O'Reilly and Derek Dobson, CEO and plan manager of CAAT, said they don't see the two new plans — OPTrust Select and CAAT's DBPlus — as competing with one another for employers or assets. OPTrust Select targets public sector, charitable and not-for-profit employers within the province, while DBPlus will seek private-sector companies across all of Canada. OPTrust Select and DBPlus will combine investments and administration with each organization's original plan. Torstar Corp., a Toronto-based media company that publishes several Canadian newspapers including the Toronto Star, announced on June 22 that it reached agreement with CAAT to merge its C$900 million pension plan with CAAT's new plan, effective Oct. 1.

"People are looking at the problem (of providing adequate retirement income) and coming up with different ways to solve it," Mr. O'Reilly said. "Instead of competing with that, I think it gives people more choice to make a decision that's in the best interest of the organization. Instead of a competitive environment, it's created a choice environment."

Mr. Dobson added, "We're singing from the same song sheet. It's not just promoting DB. It's gone from talking about it to actually doing something about it."

Helping with DB plan promotion had been the Ontario government under Liberal Premier Kathleen Wynne, Mr. O'Reilly said. Ms. Wynne championed the Ontario Retirement Pension Plan, a proposed provincial supplement to the C$337.1 billion Canada Pension Plan, Ottawa. That proposal ultimately led to the Canadian government creating its own national CPP supplement, which will begin in 2019. ORPP never was instituted.

Ms. Wynne's government fell in provincial elections June 7 to the Progressive Conservatives party led by Doug Ford, who will take over as premier on June 29. But Mr. Dobson said all political parties in Ontario, including the Progressive Conservatives, have indicated their backing for promoting DB plans. Mr. Dobson said, "There's broad support for pension innovation."

There's yet another option for DB investments as the Investment Management Corp. of Ontario, Toronto, this month begins its second year of managing the investments of public pension plans as well as endowments and foundations looking to offload investment responsibilities to a third-party, government-sponsored money management business. However, the plans will retain administrative responsibilities and asset-allocation decisions.

"I don't view myself as competing with CAAT (or) OPTrust," said Bert Clark, IMCO's president and CEO. "I'll let them do what they do. In most cases, what people are looking for is the best access to investments rather than administration."

IMCO allows plan clients to set their own risk tolerance and asset allocation, but leave investment implementation to investment professionals working under IMCO. That's similar to government-linked corporations in Alberta, British Columbia and Quebec that manage their provincial pension and other assets.

The Ontario investment corporation was launched last July with assets of the C$29.4 billion Workplace Safety and Insurance Board and the Ontario Pension Board, which administers the C$26.4 billion Public Service Pension Plan, Toronto. The two asset owners have provided assets and investment staffs to create the foundation for the new firm, which operates independently from the Ontario government.

Unlike the new CAAT and OPTrust plans, Mr. Clark said IMCO is not "looking to merge liabilities but instead will provide them with better investment capabilities. For most organizations, that's what worries them the most. There may be options available for some plans, but it's very complex to merge liabilities. Those plans might not come to us. But they might go to OPTrust or CAAT. That's already happening there. We're here to manage assets, that's it."

IMCO's first annual report, for 2018, will be released in 2019 and include the organization's first investment performance report.

The new CAAT and OPTrust plans aren't the only additional DB plans that have been proposed. Ontario Teachers officials looked into developing a separate platform in 2012 but did not follow through.

"Five or six years ago, there was conversation about it," OTPP's Mr. Mock said. "But to be honest, at almost C$190 billion and managing a global platform in infrastructure and private equity, and having offices in Toronto, London, Hong Kong, New York, it really is a full-time job, frankly, being focused on Ontario Teachers given the responsibility and the mission that we have. Part of it is not to dilute that effort and stay focused, given the size of the plan and its global nature."