Using OPSEU survey findings, the CLMPC has estimated that, in 1998, approximately one-third of total Canadian employer-sponsored pension assets fall under some version of jointly-trusted administration. This is a minimum level, based on the assets of the top public sector funds identified in the survey combined with those of several of the largest multi-employer funds in the private sector. On the other hand, such funds are a minority in Canada's 3,500-fund universe. It also should be added that not all joint trusteeship models identified here enjoy the unqualified endorsement of labour participants.
Quite simply, all policies and processes for investing the assets of pension funds originate with the promise to plan members of retirement income and the strategies chosen to reliably meet that promise. Pension fiduciaries - governing, managing and operating - must plan carefully for the timely delivery of promised benefits, both current and future, and take steps to account for all knowable pitfalls that can throw otherwise guaranteed obligations off track.
To accomplish this, a sound investment policy is one that is intimately linked with its funding policy - or the decision about the rate of contributions made - as assets must be accumulated methodically to provide for immediate or long-term benefit payments to retiring employees. Put another way, plan assets (i.e., contributions plus investment revenues) are required to cover plan liabilities (i.e., outlays to beneficiaries). This is one way of describing the burden of investment policy since, as research has demonstrated, earnings from the strategic allocation of assets outweigh contributions as a source of plan revenue by a ratio of 80:20.Endnote 22
In formulating investment policy, fiduciaries generally consider what is the minimum level of assets need to achieve full funding of the pension promise. They look for an appropriate balancing of assets and liabilities. Depending on the time horizons for maintaining this balance, fiduciaries develop a formal investment statement for the pension plan (i.e., the Statement of Investment Policies and Goals). At the heart of this policy is the asset mix that effectively defines all key investment imperatives, such as financial return objectives, diversification and risk parameters.
Trustee concerns about the funding status of a pension plan sometimes dictate a more conservative investment stance. If the funded portion of a plan is expected to cover liabilities for only a short period of time (e.g., a few years), its asset mix is likely to be significantly different from a plan with liabilities that stretch into the long-term. Concerns about the prospects of under-funding, or inadequate minimal assets in balance with anticipated liabilities, may require that pension asset allocations be altogether risk averse.
Conversely, in secure funding circumstances, strong earnings from a widely-diversified investment portfolio can ultimately relieve any pressures on a pension fund's contribution base (e.g., declining contributions due to declining employment levels) and reduce operating costs. This suggests a potentially higher degree of risk tolerance. In a good position to emulate this quality may be large defined benefit plans with long-term liability considerations. Plans such as these may possess, like some other institutional investors, the capability to be patient investors in a broad mix of assets classes (and capital markets) with the goal of realizing risk-adjusted and cost-adjusted returns over time.
Trustees do not approach lightly the complex task of translating funding policy into investment policy and strategy. Neither do other pension fiduciaries with related decision-making powers. The obvious reason, discussed in the previous section, is that Canadian pension standards legislation, in the federal and provincial jurisdictions, holds these individuals responsible for the prudent administering of assets. Under the law, pension fiduciaries have explicit and enforceable duties in relation to plan participants and beneficiaries whereby the interests of the latter are the only consideration in decisions, including investment decisions.