You know them by their handles: HOOPP, OMERS, OPB, OP Trust, and Teachers. These five defined benefit pension plans make up the bulk of the pension assets for public sector workers in Ontario. Which means that the Ontario taxpayer is on the hook for each when the markets fail to produce sufficient capital growth and income to meet the contractually promised benefits. With $338 billion of collective investment assets at the start of the 2011 fiscal year, there is a lot a taxpayer risk when the market wanes.
Each of the five plans has its own unique qualities and history. HOOPP is known to be a plan filled with younger workers in the medical field, while the Teachers is a more “mature” vehicle of teachers who often live to 90 or 100 years of age or more. If you live in London, Ontario and work for the public sector on the Provinical side, these are the five entities that the government set-up years ago to serve your needs.
But you’ve got to ask yourself: why a London firefighter, a London teacher, a local OPP officer, a local MTC employee and a nurse at St. Joseph’s Hospital might all be served by different pension plan managers with seemingly different strategies and risk tolerance levels? That can’t be the most efficient way to manage scarce financial resources in wild stock and credit markets, particularly when the same taxpayer winds up funding the shortfall if things don’t go as hoped. Which has been the case for at least the past three years.
From the outside, the five plans look to be well-managed and efficient. Some of the finest and sharpest people in the country spend their time at these shops, trying their best to meet the needs of their beneficiaries. And perhaps it would be unwieldy to have the five combined into a single mega-fund, although none of the challenges that have befallen Quebec’s Caisse de Depot (or are looming at CPPIB) can be directly blamed on its massive size.
But there is something odd about several same-taxpayer-backed pension plans running their own internal private equity or infrastructure groups, is there not? Aren’t they likely to bid for the same assets at times, and drive up the price as a result?
The capital under management is impressive (HOOPP – $72.6 billion in assets, OMERS – $70.8 billion, OPB – $21.5 billion, OPTrust- $13.9 billion, Teachers – $158.5 billion), and the would-be consortia is one of the largest pools on the continent. Their asset allocations are different, which undoubtedly reflects the long term liabilitiy requirements of their worker population. But that’s not to say they don’t overlap. HOOPP, OMERS, OP Trust and Teachers all run their own direct private equity and infrastructure strategies. While OMERS will do venture capital, for example, HOOPP won’t touch traditional venture with a 10 foot pool.
And yet the Ontario taxpayer funds it all, whether the strategies compete or conflict with each other.
Each fund also has its own approach to public market management, as well. Some do most of it in-house, while others farm out the stock and bond picking to external managers. Invariably, these costs all wind up coming out of the pockets of the employer and employee in the form of the fund’s own unique investment management expenses and pension admin expenses, which amounted to $959 million in 2010.
Just think: five different actuaries; five different audits; five different custodians; five different IT departments managing multiple offices….
Some funds spend over 100bps a year to manage their money, while others come in around 20bps. Scale usually matters, but the figures below show just how differently each Board approaches their investment strategy, and the costs that go with it:
Investment Management Expense: 2010 – $88M, 2009 – $93M
Pension Admin Expense: 2010 – $41M, 2009 – $38M
Gross Assets at end of year: 2010 – $72.665B, 2009 – $59.186B
Expenses as a % of Gross Assets: 2010 – 0.18%, 2009: 0.22%
Investment Management Expense: 2010 – $268M, 2009 – $246M
Pension Admin Expense: 2010 – $54M, 2009- $48M
Gross Assets at end of year: 2010 – $70.895B, 2009 – $ 61.958B
Expenses as a % of Gross Assets: 2010 – 0.45% , 2009 – 0.47%
Ontario Pension Board
Investment Management Expense: 2010 – $10M, 2009 – $ 8M
Pension Admin Expense: 2010 – $23M, 2009 – $25M
Gross Assets at end of year: 2010 – $21.551B, 2009 – $19.699B
Expenses as a % of Gross Assets: 2010 – 0.15%, 2009 – 0.17%
Investment Management Expense: 2010 – $123M, 2009 – $113M
Pension Admin Expense: 2010 – $19M, 2009 – $18M
Gross Assets at end of year: 2010 – $13.924B, 2009 – $13.393B
Expenses as a % of Gross Assets: 2010 – 1.02%, 2009 – 0.98%
Investment Management Expense: 2010 – $290M, 2009 – $214M
Pension Admin Expense: 2010 – $43M, 2009 – $38M
Gross Assets at end of year: 2010 – $158.561B, 2009 – $127.053B
Expenses as a % of Assets: 2010 – 0.21%, 2009 – 0.20%
As a fund manager, we love having more doors to knock on. It is counterintuitive for our industry to suggest folding five potential limited partners into a single mega fund. We just wind up with a fund manager who says “we are too big to do small $25 million allocations”. But, as taxpayers, we can’t ignore the sacred cows. Investment management gets cheaper as the assets under management grow, regardless of the strategy being deployed. It’s pretty simple.
As Premier McGuinty and Finance Minister Duncan look to find economies across government, a 5 or 10% cut to the overall management expenses of these five funds could produce hundreds of millions of savings over a five year period. Something a minority government is ever keen to manufacture, particularly when it doesn’t involve cutting programs or services.
Tackle this, Minister, and you’ll have the moral authority to move on to consolidating the multitude of different Ontario University and College pension plans.
(disclosure – one of our LPs is an Ontario-based gov’t backed pension plan)