Report: Pension Committee - September 23, 2020

Via Virtual Meeting


September 23, 2020

To the Governing Council,
University of Toronto.

Your Committee reports that it held a virtual meeting in closed session on Wednesday, September 23, 2020 at 4:00 p.m.

Present: Cynthia Messenger, Chair; Janet L. Ecker, Vice-Chair; David N. Bowden; Colleen Burke; Louis Florence; Joan Johnston; Anna Kennedy; Sameer Lal; Rajiv Mathur; Kim McLean; Jun Nogami; Andrew Padmos; Andrew Szende; Maureen Stapleton; Paul Whittam; Bruce Winter; Lara Zink; Terezia Zoric

Alex D. McKinnon

Non-Voting Assessors:
Sheila Brown, Chief Financial Officer
Scott Mabury, Vice-President, Operations and Research Partnerships 

David Walders, Committee Secretary

In Attendance:
Pierre Piché, Controller and Director of Financial Services
Elizabeth Brown, Brown Mills Klinck Prezioso LLP
Allan Shapira, Plan Actuary, Aon
Daren Smith, President and Chief Investment Officer, University of Toronto Asset 
    Management Corporation (UTAM)

The Committee met in closed session

Pursuant to section 33 of By-Law Number 2, 
consideration of item 12 took place in camera


  1. Chair’s Remarks

    The Chair welcomed members and guests to the first Pension Committee meeting of the year. 
  2. Discussion: Orientation and Committee Responsibilities

    The Chair drew member’s attention to the orientation materials that had been provided in advance of the meeting.  

    There were no questions from members on the orientation materials. 
  3. Pension Fund Master Trust Statement of Investment Policies and Procedures, September 23, 2020

    Ms Sheila Brown, Chief Financial Officer, drew member’s attention to the proposed revisions to the Statement of Investment Policies and Procedures (SIP&P). She noted that the SIP&P had most recently been approved at the Pension Committee meeting on March 25, 2020.  This proposal concerned a proposed drafting change to the table on the bottom of page 7 for the benefit of clarity and consistency and a correction to the currency hedging wording on page 10 which was changed in the March update when no change was intended.

    In reply to a member’s question, Mr. Daren Smith, President and Chief Investment Officer, UTAM, explained that within both credits and rates, there were allowable minimum and maximum weights, as well as well as total minimum and maximum allocations for credits and rates combined.  This allowed for flexibility in investment decisions. 

    On motion duly made, seconded and carried 

    It was Resolved

    THAT the Pension Fund Master Trust Statement of Investment Policies and Procedures dated September 23, 2020 and attached as Appendix C, be approved, replacing the Statement of Investment Policies and Procedures, attached as Appendix A, which had been approved by the Pension Committee on March 25, 2020.
  4. Review of Investment Performance to June 30, 2020

    Ms Sheila Brown, Chief Financial Officer, provided the Committee with introductory comments, noting that the next agenda item (#5) provided an projection of the pension funded status to June 30, 2020 which reflected the investment results being presented in this agenda item.  She noted that these results had not yet been audited. 

    Mr. Smith reported on the evaluation of actual PMT performance against the investment return targets and the Reference Portfolio (as articulated in the Pension Fund Master Trust Statement of Investment Policies and Procedures (SIPP)) returns for the twelve-month period from July 1, 2019 to June 30, 2020. 

    Mr. Smith highlighted the following key points related to the investment performance and the risk dashboard for the fiscal year ending June 30, 2020:
  • The target investment return for the PMT was 4.7%;
  • The actual return for the PMT for the twelve-month period was 2.3%;
  • The return for the Reference Portfolio for the twelve-month period was 5.5%;
  • All reported return percentages were net of all investment fees and expenses, including UTAM expenses.

    The discussion that followed focussed on the recent underperformance of the actual portfolio in comparison to the Reference Portfolio.  Members asked questions regarding the causes of the underperformance shown in the attribution analysis slide as well as information on any plans to change the portfolio given the underperformance. In response, Mr. Smith acknowledged that fiscal 2020 had been a difficult year.  With that said, a longer view of investment performance presented a clearer picture of the value-add provided by UTAM.  Over the 10-year period UTAM had outperformed the target return and the Reference Portfolio return and had added over $150M to the portfolio net of investment fees and expenses. Mr. Smith noted that UTAM was constantly evaluating its strategies and the investment managers in the portfolio, but that at this time, significant changes were not expected to occur. Mr. Smith indicated that UTAM continued to have a high level of conviction in its investment managers. In many cases, the managers who have struggled recently were the same managers that had outperformed over a longer period of time leading to UTAM’s 10 year record of outperformance.  

    The Chair thanked Mr. Smith for his report.
  1. University of Toronto Pension Plans: Projection of Funded Status to July 1, 2020

    Ms Brown stated that for the purposes of the projection, the going concern accrued liability for the University of Toronto Pension Plan (RPP) as at July 1, 2020 had been estimated using the proposed assumptions at July 1, 2020. She added that it was important to note that the estimate had been prepared using a roll-forward of demographic data at July 1, 2019 and that the actual experience for the 2019-20 year had not been reflected in the estimated accrued liability. As previously stated, the actual unaudited investment return to June 30, 2020 was reflected in the projection. The estimate would be revised and updated when actual July 1, 2020 financial results were finalized.

    Mr. Shapira, Plan Actuary, Aon presented an overview of the estimated fund status, highlighting the following points:
  • Valuation of the plan was examined from two perspectives: going concern and solvency, and using three sets of going concern assumptions - current, proposed, and University Pension Plan (UPP);
  • Using the proposed going concern assumptions and the new, required funding rules, at July 1, 2020  the going concern accrued liability for the RPP is estimated to be about $6.392B, and the market value of assets are estimated to be about $5.477B; and the unfunded accrued liability was estimated to be about $915.0 million ($6.392B - $5.477B).

    Mr. Shapira stated that the estimated unfunded liability of $915.0 million at July 1, 2020 was an increase from 2019, due to a multitude of factors including
  • investment returns which reflected the impact of COVID-19,
  • the proposed changes to assumptions, which would be discussed in the next item, and
  • the new, more prescriptive funding rules as required by pension legislation, which incorporate a best-estimate discount rate combined with a Provision For Adverse Deviation (PfAD)

    In response to questions, Mr. Shapira confirmed that an increase in current service pension contributions had a positive impact on the deficit as the University moved towards a 50:50 cost sharing between employees and the University. In respect of special payments, it was important to note that the amortization period under the UPP would be 15 years, as opposed to the 10-year amortization period required under the funding rules for the current plan. In respect of investments, at present, there was uncertainty within investment markets due to COVID. The currently budgeted level of special payments would have room to accommodate a somewhat larger deficit than that currently estimated at July 1, 2020 under the UPP funding assumptions. 
  1. University of Toronto Pension Plans: Actuarial Assumptions

    The Chair stated that the actuarial assumptions themselves were presented for approval while the historical look at actuarial assumptions was included for information only. She referred members to the background materials on Determining Pension Liabilities and Assets.
    1. History of Actuarial Assumptions, 2005 to 2019

      The History of the Actuarial Assumptions for the period from 2005 to 2019 was received for information.
    2. Proposed Actuarial Assumptions at July 1, 2020

Ms Brown reported that a complete and thorough review was conducted annually by the Plan Actuary and the University’s administration. Mr. Shapira reported that the following changes were proposed:

  • Mortality assumption – Apply a 95% adjustment to the mortality rates under the CPM 2014 Public Sector Mortality Table.  
  • Inflation / Consumer Price Increase (CPI) assumption – Reduce the rate to 1.75% from 2.00% to reflect the lower inflation expectations implied in long-term Government of Canada bonds, and the declining break-even inflation rate (the spread between the yields on long-term nominal and real return Government of Canada bonds). 
  • Investment Return (discount rate) assumption – Change from 5.55% (CPI + 3.55% real return), which included a margin, to 5.35% (CPI + 3.60%), without a margin, to which a PfAD would be applied under the new funding rules. Both percentages were net of fees and expenses.
  • The proposed change in the inflation assumption resulted in changes to other assumptions which incorporate the inflation assumption. 

    Finally, it was noted that the solvency and hypothetical wind-up assumptions were largely prescribed by Ontario regulation and were heavily affected by current market conditions, particularly interest rates – they were updated to reflect the requirements at July 1, 2020.

    On motion duly made, seconded and carried

    It was Resolved

    THAT, effective July 1, 2020, the going concern, solvency and hypothetical wind-up assumptions, contained in Attachment 1, Appendix 1, in the memorandum from Sheila Brown, Chief Financial Officer, dated September 2, 2020, for the University of Toronto Pension Plan and the Supplemental Retirement Arrangement, be approved.
  1. Report of the Previous Meeting: Report 41, May 27, 2020

    Report Number 41 of the Pension Committee meeting held on May 27, 2020, was approved.
  2. Business Arising from the Report of the Previous Meeting

    There was no business arising from the previous meeting.
  3. Date of the Next Meeting: December 9, 2020 at 4:00 p.m.

    The Chair confirmed that the next meeting of the Committee would be held on December 9, 2020 at 4:00 p.m. 
  4. Reports of the Administrative Assessors

    There were no reports of the assessors.
  5. Other Business

    There were no other items of other Business.

The Committee moved in camera.

  1. Update: University Pension Plan Ontario [“the UPP”]

    Professor Angela Hildyard, Presidential Special Advisor, provided an update on the UPP

    The Committee moved back into closed session. 

The meeting adjourned at 5:58 p.m.