1. How did the fund perform overall?

The Ontario Teachers' Pension Plan earned a 10.9% rate of return in 2013, exceeding the fund's benchmark by 1.6 percentage points. This resulted in $2.1 billion more than the composite benchmark, which is what we call value-added returns.

Net assets increased to an all-time high of $140.8 billion at the end of 2013, from $129.5 billion a year earlier.

Here is a performance breakdown by asset class:

Asset Class Performance Benchmark
Total 10.9% 9.3%
Equities 27.6% 26.3%
Fixed income -7.9% -8.1%
Commodities 4.2% 4.2%
Real assets 14.6% 10.6%

More information on each of these asset classes and benchmarks used is available on pages 18-34 in the annual report.

We often say that it is long-term performance that counts for pension plans. Taking a longer view, we have earned an average return of 8.9% over the last 10 years and 10.2% since the plan was created in 1990.

2. When you refer to benchmarks, what do you mean?

The benchmarks we use reflect the performance of various markets in which we invest, such as the S&P/TSX 60 Index for Canadian stocks and the S&P 500 Index for U.S. stocks. We compare our performance against these benchmarks to evaluate the effectiveness of our investment strategies and activities relative to the risks taken. Our goal is to do better than the investment returns of the relevant market benchmarks.

Different pension funds have different benchmarks, depending on their asset mixes. Every pension plan has different member demographics, contribution rates and benefit structures that influence their investment strategies, so they may use different benchmarks than we do.

A list of the benchmarks we use is available here.

3. This is the first surplus for the plan since 2003, yet bonuses were paid throughout the period when there were funding shortfalls? Why is that?

There is no relation between incentive compensation and the plan's funding status (surplus or shortfall). Incentive compensation is based on whether executives and investment staff outperform relevant market benchmarks and meet other corporate objectives.

Many important factors that affect the plan's funding status are beyond the control of the pension plan management, such as demographic trends, interest rates, contribution rates and benefit levels. (The Ontario Teachers' Federation and the Ontario government jointly decide contribution and benefit levels.) Factors that are within the pension plan's control, such as how well we manage plan assets, do affect incentive payments.

4. What are bonuses based on?

Our compensation program is designed to attract and retain talented people and reward them appropriately. It is based on the pay-for-performance principle. For example, when markets plunged in 2008 and the fund lost money, incentive compensation also declined.

Incentive compensation for executives and investment staff is based on performance relative to market benchmarks. In the last four years, the pension fund has outperformed its benchmarks, as shown below.

Year Our rate of return Benchmark return Return above benchmark
2013 10.9% 9.3% $2.1 billion
2012 13.0% 11.0% $2.2 billion
2011 11.2% 9.8% $1.4 billion
2010 14.3% 9.8% $4.0 billion