How does a 108-year-old teacher influence investment strategy?

June 06, 2012

A sluggish economy with sagging interest rates presents a challenge, but investment managers are hampered even further by the maturity of the plan.

The Teachers' pension plan is maturing. In addition to benefits exceeding contributions, retired teachers are living much longer than in the past and the ratio of working members to retired members is declining. Last year, the plan had 102 retired members over 100 years of age. With the typical teacher working for 26 years, this means members are increasingly spending more years on pension than contributing to the plan. And, in 1970, there were 10 working members to every retired member. By 2011, that ratio had decreased to 1.5 to 1.

Ratio of working to retired members

These factors directly affect the plan's investment approach. With a maturing plan, investment managers need to be as concerned about the potential loss that may stem from an investment as they are about how much money can be made from the investment.

"Our risk appetite has declined," says Rosemarie McClean, Senior Vice-President, Member Services. "We have fewer active members now to bear the burden of a negative market event through contribution increases."

While equities have historically provided higher returns, they also have a higher potential to decrease. In 1996, equities comprised 76% of Teachers' asset mix. Today, as a result of our lower risk appetite, they comprise less than half of the asset mix at 44%.

"Just when we need higher returns the most, our risk tolerance has been lowered by demographic realities so we can't afford to take more risk to close the funding gap," says Neil Petroff, Executive Vice-President, Investments.