On behalf of the board members, I am pleased to introduce this 2007 annual report.
The past year has been a momentous one for the Ontario Teachers’ Pension Plan (Teachers’) in general and for the board in particular.
With the retirement of Teachers’ founding CEO, Claude Lamoureux, one of the board’s key challenges was finalizing the selection of his successor. The appointment of a new CEO is the most important decision a board can make. This executive sets the tone for the organization and executes the broad policies set by the board. It is the CEO – not the board members – who oversees the day-to-day operations, motivates the staff and fosters the culture. It is the CEO on whom the board members and plan sponsors rely for the information and advice we need to make sound decisions.
Early in the year, the board began a transparent and comprehensive successor search. Working with consultants, we considered candidates from several industries in several countries.
One candidate was already well known to us. Jim Leech had done a superb job since 2001 as Senior Vice-President of Teachers’ Private Capital.
Still, this appointment was not preordained. Teachers’ believes in cultivating talent and promoting from within, and also strives for excellence. In technical and managerial expertise, Jim matched or beat the very best. In terms of understanding our people and culture, he was the clear winner. Jim’s appointment reflects continuity in Teachers’ leadership, and the board is confident that he will build successfully on the foundation laid by Claude.
Over the coming months, board members, Teachers’ management and representatives of the plan sponsors will work on the triennial actuarial valuation that must be filed with the plan’s regulator by September 30, 2008. The funding valuation assesses the long-term financial health of the plan and whether or not it is likely to have enough money to cover the cost of future pensions promised to all current plan members.
Key to this are the assumptions on which the plan’s funding is based. These assumptions rest in part on judgment. Previously they have attracted considerable debate, especially in light of the environment of continuing low real interest rates, which affect assumptions. A small change in these rates can profoundly affect the valuation, and hence the plan’s funding status. During this past year, with the importance of these assumptions and the long-term financial health of the plan in mind, the board and plan sponsors jointly commissioned a panel of outside experts to review the plan’s assumptions.
I would like to highlight the cooperative spirit that went into establishing the panel’s mandate and appointing its members. We now have an objective, evidence-based assessment of the assumptions and we can use this information in our critical efforts to safeguard the long-term needs of all members. Together with the Ontario Teachers’ Federation (OTF) and the Ontario government, we thank the panel for their diligent, exhaustive and insightful review.
In our role as stewards, board members feel the plan has done well for current retirees and long-serving teachers. As the plan has matured, it has become increasingly more difficult to earn the investment income necessary to secure their pensions than it was for previous generations.
There are only three factors in the pension equation: contributions, investment income and benefits. There are limits to how much members and taxpayers can contribute, and how much investment income can be earned. Teachers’ has commissioned a supplementary report to gauge what actions other mature plans have taken to ensure their long-term health.
Pension plan sponsors and managers do not usually ask members for advice on how to address funding shortfalls. However, we did exactly that this past year, in a project that required considerable teamwork on the part of the plan’s management and sponsors. A random sample of teachers was selected by independent consultants and they were asked to prioritize options for dealing with possible future shortfalls. This gave a voice to the people who, with Ontario taxpayers, bear the cost of funding the plan. The survey results are on our website and discussed elsewhere in this report. Its findings will guide the OTF and the Ontario government in the future, should a shortfall occur, bringing with it decisions about contributions and benefits.
Among our responsibilities, board members must be satisfied that management has identified the principal risks to the organization and implemented internal controls and reporting systems to address them. For the first time, in 2007 (as noted in Management’s Discussion and Analysis), the CEO and CFO have certified the design and operating effectiveness of disclosure controls and procedures, and the design of internal controls over financial reporting. Such certification is now required for Canadian public companies. It is not required for pension plans, but we voluntarily hold ourselves to the same standard of accountability that we expect from the companies in which we invest.
I would like to extend the board’s appreciation to former Chair of the Investment, and Audit and Actuarial Committees, Tom O’Neill, a valued board member since 2003, who resigned in April 2007. Raymond Koskie, who joined the board in 2006, also stepped down. Succeeding them are Sharon Sallows, a partner in Ryegate Capital Corp., and Bill Swirsky, a Chartered Accountant and former executive of the Canadian Institute of Chartered Accountants. The board, which experienced an unusual amount of turnover in recent years, is now at full complement and eager to tackle the challenges of providing pension security for all generations.
Finally, I cannot close this letter without recognizing the tremendous leadership and wisdom of Claude Lamoureux, who retired late last year. Claude compiled an extensive and impressive list of achievements during his 18 years of service to Ontario’s teachers and taxpayers. He came to Teachers’ with a vision that few others were able to see and a promise to do better in providing plan members with a secure retirement. Today, Claude’s vision is a reality and the teachers of Ontario enjoy pension income that would not have been possible without his skill and leadership. As he made good on his promise to them, Claude revolutionized pension management and fathered a corporate governance movement that has created value for all Canadian investors. He deserves our thanks and admiration.
