Home Corporate Governance Does Ontario really need five Pension Plans?

Does Ontario really need five Pension Plans?

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%

OP Trust
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)

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9 Comments  comments 

9 Responses

  1. Andy Moysiuk

    Intersting summary, I offer a few clarifications relating to HOOPP:

    1)Hoopp is a private trust, the largest of its type in Canada. By its design, the Ontario taxpayer is not structurally responsible for the outcomes at Hoopp.
    2)Hoopp’s size, measured by net assets is in order of $40 billion. Certain investment strategies are grossed up to reflect economic effect from an accounting standpoint.
    3)Hoopp is among the few plans in the world of size that is in a surplus. Investment approaches, philosophies, and liability profile in each institution actually differ quite dramatically. All the firms noted have sufficient scale to operate very efficiently, certainly by customary asset management firm standards.
    4)I am unware of many instances where any of the funds noted compete on deals, no doubt some overlap, but we are more likely to partner verses disort the marketplace, especially in global transactions of scale.
    5)HOOPP Capital Partners, the private equity arm, presently has at least $150 million presently invested in start up and venture, defined as bsuiness plans having burn rate attributes. Many other of our pe investments are growth capital, low leverage situations, with some venture like attributes. It is true that we do mostly eschew traditional venture capital limited partnerships with many underlying investments, we simply favour more bespoke, concentrated means of execution in Canada, the US and Europe.

  2. Greg

    Good article. Based on your numbers, OMERS sure stands out the expense side vs its larger peers. Another interesting data point would be to show the resulting performance records.

  3. TBT

    How come the fact that members of some of those pension plans MATCH what the government contributes? As a member of one of the plans I contribute 10% of my own salary. I can’t speak of how the other plans work, but 10% is a number I am comfortable with. Each plan also has different investment strategies which subject its members to different levels of risk — the same risk tolerance cannot be said for all members of all plans. Also the actuarial analysis is specific to each plan: a teacher will statistically live longer than a firefighter or a police-person.

    While I believe in leveraging economies of scale, we should do so through common technology and back-bones between the funds — not necessarily merging the funds into one superfund.

  4. Irwin

    Please get your facts straight. Hoopp is in no way affiliated with the government and the taxpayers certainly are not on the hook. Also the assets under management are 37 billion not 73 and the investment management expense isn’t even in the ballpark.

  5. Hi Irwin

    Thanks for stopping by. How is the HOOPP not affiliated with the government? Is there a private hospital system that has been kept underground all these years? According to their annual report: “Among our 260,000 members and retirees are nurses, medical technicians, food services and laundry workers – and the many other people who work hard to provide you with your valued Ontario healthcare services.”

    According to pg. 32 of the 2010 financial statements, HOOPP had assets of $72.6 billion. http://www.hoopp.com/annualreport/2010_AnnualReport.pdf You are thinking, perhaps, about their “net” assets of $35.7 billion. But since each pension plan manages all of its assets, and spends money administering same, I thought doing the calcs on the gross asset base made more sense.

    In a defined benefit plan, employers are on the hook to make up any pension deficit that results from poor returns or unecessarily high management costs. HOOPP may be a “trust”, but if the fund is in a deficit, the employer (ie. the taxpayer) isn’t absolved of responsibility for making up the difference.


  6. Hi Andy

    As always, you add to the discussion on this site whenever you drop by.

    If hospital employers are not on the hook for any pension deficits at HOOPP, then I stand corrected, but I have a question. How is a deficit dealt with should one ever arise on a sustained basis? Does the actuary not require the employer to post an L/C, unless it is prepared to make special one-time lump sum payments to make up the difference?

    As for competiton between Ontario pension plans, there are plenty of situations that come to mind. For the casual reader, the names Oxford and Cadillac Fairview will be among the better known examples.


  7. Hi TBT

    Thanks for the perspective.

    I’m not recommending the government merge the actual investment funds; there are too many complications for that to be doable. The assets would have to be segregated for existing employees. But new government workers are a different story, and could all invest in the same fund.

    For the existing plans, a federated management system would work even with segregated asset management, and back office collaboration is a slam dunk.


  8. I question the overall concept due to teh “too big to fail” nature of the superplan. I further question the use of gross asset numbers rather than net – though your argument would likely be even more compelling under net numbers as expense ratios would be much higher

  9. […] weeks ago, Ontario was abuzz over a blog post by Mark McQueen suggesting that the Canadian Province scrap its five large defined benefit pensions […]

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