“We use it to ensure we can pay pensions as well as bring in new members in the future,” said Peter Lindley.
By Rick Baert
At OPTrust, liability driven investing is a means to an end — but not the end of the C$20 billion pension plan.
Rather than being an investment strategy that ultimately targets the closing of a defined benefit plan, as is the case with corporate DB plans, OPTrust’s use of LDI maintains the plan as a going concern, said Peter Lindley, president and chief executive officer.
“LDI for us is the opposite” of shutting down a plan, embodied in what OPTrust calls a member-driven strategy, Lindley said. “We use it to ensure we can pay pensions as well as bring in new members in the future. We have no intention of winding up. I understand corporations wanting to use LDI to do that. But that’s not why we use it.”
Instead, Lindley said, LDI helps to insure the long-term sustainability of the Ontario Public Service Employees Union (OPSEU) Pension Plan, a defined benefit plan with assets managed by OPTrust. According to OPTrust, it relies on a Member Driven Investing (or MDI) strategy that is similar to LDI but “more directly linked to our members and the demographics of the plan.”
“That sustainability has an investment aspect,” Lindley said. “We use a sophisticated investment approach, cognizant of our liabilities, that’s designed to reduce the amount of risk we have. We do that by maximizing the use of fixed income, but we understand that won’t be enough to maintain the plan on a going-concern basis. So we also manage private equity, infrastructure and real estate internally.”
OPTrust’s overall investment strategy has led the plan to be fully funded for each of the past 10 years through 2018, Lindley said, adding that “things are looking good” to continue that trend.
Its asset allocation as of Dec. 31, 2018, was 33.8% fixed income, 28.6% pooled and hedge funds, 14.7% real estate, 12.4% infrastructure, 11.5% private equity, 10.8% public equity and -11.8% in currency, overlay and other strategies. OPTrust plans to release its funded status and annual report for 2019 in March.
OPTrust’s investments are a point of pride for Lindley, who assumed the top spot at the firm in September 2019. He replaced Hugh O’Reilly, who left earlier last year to pursue other interests. Lindley came from State Street Global Investments (Canada), where his position at president and head of investments gave him perspective on Canadian defined benefit plans from both the investment and administrative sides.
“Most of my time at SSGA was spent with clients,” Lindley said. “I met with pension funds, small and large. It allowed me to view pension funds from a member perspective — what do they expect from us? At OPTrust, we have an excellent member services team. Our concern is what value can we add to that member experience.”
Another important focus for Lindley is continuing the growth of OPTrust Select, a service offered to public sector and not-for-profit employers in Ontario that don’t offer a defined benefit plan. OPTrust Select offers employees in those sectors a chance to participate in a DB plan administered and invested by OPTrust staff, Lindley said.
“It’s two plans that are effectively one — one plan with two schedules of benefits,” Lindley said.
Along with providing a retirement plan for smaller public employers and not-for-profits, Lindley said, OPTrust benefits from added participation by creating “a larger asset base, which allows us to go into new areas of investment. And new members increase the stability of the pension plan. Because new members aren’t in an existing DB plan, we don’t inherit any large liability as we would with merging with an existing plan.”
Increasing the assets of OPTrust improves its ability to pool risk, Lindley said, unlike other retirement vehicles like defined contribution plans and annuitization.
“When we think of the benefits of a DB plan, a huge benefit is risk pooling,” he said. “While we continue to take risk in a pension plan, I liken it to a big bath, where you put water in and take water out. The more you put in allows us to take on more risk. You lose that in the defined contribution or annuity space.”
Another bonus, Lindley said, is that OPTrust does not charge its member fees, unlike investments in a DC plan or in an annuity. “Seventy cents of every $1 we pay out comes from investment returns,” he said. “That’s the benefit of risk pooling. It also means there’s less impact to current active (union) workers.”
Rick Baert is a freelance journalist who specializes in covering institutional money management, trading and asset servicing. He is a retired editor and reporter with 42 years of experience with financial, business and daily news services. Rick has covered the Canadian pension fund industry for the past six years.